Item 807.00 were eliminated, there would be absolutely no incentive for the use of American components by manufacturers anywhere in the world in assembling products to be sent to the United States. Accordingly, the absence of this tariff benefit will discourage the purchase and use of wholly United Statesmade components. Elimination of Item 807.00 would, therefore, result in a substantial reduction in the amount of United States-manufactured components sold, and in an increase of the amount of wholly foreign components purchased and imported into the United States. Careful consideration of the assembly operations makes it clear that only the presence of Item 807.00 makes the use of United States-manufactured components possible. The United States component manufacturers and all their labor force have, therefore, a great stake in the continued availability of Item 807.00.

Based on the varied experiences of our assemblers in the application of Item 807.00 and Item 806.30, one must conclude that the United States would lose far more than it could possibly gain by the elimination of these provisions, both in general economic activity and employment. The employment which would be lost would be that which brings into play the highly paid skills of technicians, engineers and processors, while any worker who might be hired as a result of its repeal would be only in the category of hand assemblers.

The Tariff Commission's report of 1970 made it apparent that the application of Item 807.00 has greatly benefited the United States economy and has created thousands more jobs than it has caused to disappear. It must always be remembered that Item 807.00 has made it possible for wholly-manufactured United States components to be manufactured, assembled, and sold in the United States markets in competition with importations of wholly-foreign origin, with which the United States components could not otherwise have competed.

Accordingly, if the United States manufacturers of components are going to be able to continue to compete in the world market, Item 807.00 must not only be retained, but this provision should be liberalized and simplified to exclude the value of all United States components and materials and the value of all design and development costs incurred in the United States from the dutiable value of imported assembled articles.

Respectfully submitted.

Dated: March 25, 1976.

Mr. GREEN. Thank you very much.

Mr. FRENZEL. Thank you very much for your testimony.

Getting back to the problems of apparel manufacturers in your area, did I understand you to say that the local manufacturers cannot hire enough skilled needle workers to do this job and they are obliged to go to Mexico.

Mr. SHOSTAK. That is correct. In most cases they would not like to put themselves in the position of dealing with customs laws and foreign governments and the different delays and other after effects they have of dealing under 807.00. They deal in many cases with independent contractors who perform the service of picking up the cut fabrics in the United States, taking them to Mexico and bringing them back either duty-paid or not duty-paid, depending on what the arrangement is. There are others who have plants in Mexico.

One point that I wanted to make and forgot was with respect to the Mattel operation in Mexicali which employed at its height approximately 2,500 employees or more. That operation is now closed. The 2,500 jobs have not come back to the United States and probably the net result ultimately will be the support jobs for that operation in the United States will be lost.

Mr. FRENZEL. No matter whether you have to or whether you want to, under 807.00 there is still the incentive for the American seller to have as much larger component of American produced goods in the final item for sale as possible. Is that still true?

70-887-76—16

Mr. SHOSTAK. In the manmade fiber area which is about the only area left, that is doubly true because the value of the U.S. components is also applied against the weight factor in determining the ultimate dutiable rate to be applied to the merchandise.

Mr. FRENZEL. Instead of jobs running away, one might look at it as preserving jobs in other industries or even preserving jobs in that particular industry?

Mr. SHOSTAK. I certainly feel it does retain these jobs. Most of these people are manufacturers only in the sense of offering themselves as manufacturers. Most of their actual work, that is the sewing work is done by contractors.

Mr. FRENZEL. Would you make the same statement that Mayor Doan made that if they lost 807.00, some of these people would go offshore permanently?

Mr. SHOSTAK. I would say one of three things has to happen. If they are adventuresome and maybe foolhardy they will go offshore. If they are not adventurous and they don't have the capital to go offshore they will do one of two things. If the market will permit them to raise their prices high enough-and I think one thing that has not been mentioned is with respect to garments there has been a general holding down of the market price as a result of the availability of 807.00-they would pass on the increased prices to their customers. The other alternative is to go out of business.

Mr. FRENZEL. In your experience could you corroborate some of the statements made before our committee today, that is, one is the retailer makes a lot of money and another witness said: "No, the benefits are reaped by the importer and never does the consumer get the benefit of the lower price offshore." Then we had further testimony yesterday that said this was the most competitive industry in the world and that the differences in prices were almost always reflected in the price to the consumer. Which of those is correct?

Mr. SHOSTAK. I think at different times they may all be correct. But I think ultimately, at least with respect to wearing appareland that seems to be the prime focus-in my experience the people who are involved with assembly abroad don't save anything.

We are dealing with a duty rate of at least 35 percent when you add the weight to the ad valorem. Thirty-five percent, even excluding the U.S. component parts, is a substantial amount of duty.

The cost of transporting them, the markup, and the other expenses that are inherent in producing the garment don't leave that much room. In my experience, in most cases they are working on a very tight margin in the United States and the margin is just as tight or tighter when they go offshore.

Mr. FRENZEL. Thank you very much for your fine statement.
Mr. GREEN. Thank you, sir.

Our next witness is Mr. Jack R. Kay, chairman, Border Industries Committee, president of Kay Electronics. Welcome, Mr. Kay.

STATEMENT OF JACK R. KAY, CHAIRMAN, BORDER INDUSTRIES COMMITTEE, U.S.-MEXICO CHAMBER OF COMMERCE, AND PRESIDENT, KAY ELECTRONICS, ACCOMPANIED BY ALBERT LUDY AND DICK BOLIN

Mr. KAY. Thank you, Mr. Chairman, my name is Jack Kay. I have Mr. Albert Ludy with the United States-Mexico Chamber of Commerce and Mr. Dick Bolin of the Flagstaff Institute. To save your time, I would like to call your attention to just three points about the testimony.

Mr. GREEN. Your written statement will be included in full in the record.

Mr. KAY. We have the replies to the questionnaire regarding the jobs if this section were repealed. We would be pleased to furnish blind copies to you if you wish.

Also the Flagstaff report was to accompany my statement. I don't know if it got passed out or not. It looks like this.

We feel there is a relationship in the rapid extra growth of exports to the less developed countries where the 806.30, 807.00 operations are located. These exports account for approximately 800,000 U.S. jobs. That is covered in the statement.

In regard to companies that would move or not move their operations back to the United States, as of today for my own company we would not move our offshore operations back to the United States for the reason stated in the testimony.

In summary, I would like to say that American industry has been using 807.00 to compete with foreign manufacturing and protect as many jobs as possible. If you repeal section 806.30 and 807.00, you will be in effect supporting foreign industries and penalizing American industry which hardly seems to be the bicentennial spirit. If you repeal these sections then you must close America's door to all manufacturers which will eventually eliminate America from world markets and this is shortsighted. Without world markets, we cannot continue to grow. I would suggest as some other countries do, that you look at ways to aid American industry to become stronger. You do not have to be negative. You could be positive and help our industries dominate all the world markets thus developing a more solid employment base in the United States. You might consider allowing all 806.30 or 807.00 products with over 80 percent of U.S. components to come in duty free.

Thank you.

Mr. GREEN. Thank you very much, Mr. Kay.

Mr. FRENZEL. I have no questions.

Mr. GREEN. That concludes our hearing for today. I would ask unanimous consent that the background material prepared by the staff of the U.S. International Trade Commission be inserted in the record as an appendix.

[The prepared statement and appendix follow:]

STATEMENT OF JACK R. KAY, CHAIRMAN, BORDER INDUSTRIES COMMITTEE,
THE UNITED STATES-MEXICO CHAMBER OF COMMERCE

My name is Jack R. Kay. I am President of Kay Electronics, Inc., 630 South Rogers Road, Olathe, Kansas, 66061. We manufacture crystal holders

and we have assembly operations in Mexico, El Salvador and Haiti, making use of TSUS Item 807.00.

I am also Chairman of the Border Industries Committee on the United States-Mexico Chamber of Commerce, 1800 K Street, N.W., Washington, D.C., 20006. The Chamber is an association of over 300 United States and Mexican business firms engaged in trade and/or other economic activity between the two countries. Its general objective is to foster better business and commercial relations between the United States and Mexico. A directory of the Chamber's members accompanies this statement.

I am appearing here today on behalf of the Chamber to testify in opposition to the bills which the Subcommittee is currently considering which propose to eliminate Items 806.30 and/or 807.00 from the Tariff Schedules of the United States, or to restrict their application in one form or another.

As the Subcommittee is aware, Mexico ranks first among the developing countries of the world as a source of Item 806.30/807.00 imports, due primarily to its contiguous location. This trade affects not only the workers who manufacture the products involved, but many thousands of U.S. workers involved in trucking and rail transportation, banking, insurance, freight forwarding, customs operations, etc. It is estimated that about 70 percent of the income earned by Mexican workers in border industry plants returns to the United States almost immediately in purchases by Mexicans in U.S. border cities.

The employment opportunities for Mexicans that have been created in new assembly plants close to the border provide a livelihood for families which otherwise might have seen their breadwinners leaving to become illegal immigrants to the United States. (It was not a coincidence that the border industralization program was developed immediately after the legal immigration of agricultural workers-braceros-was cut off.) On the other hand, the program achieved its great impetus at a time when many U.S. companies were seriously threatened by competition from imports, especially from Japan.

I recently asked the Flagstaff Institute, a non-profit research organization dedicated to improving world trade, to undertake a study on the impact of 806.30/807 on the U.S. economy and employment. When this study was completed, I was astounded to learn that 800,000 Americans are directly employed in LDC export-related jobs. An estimated additional 2.4 million indirect jobs are based on these manufacturing jobs. I also found that there are over 50,000 U.S. direct manufacturing jobs to supply components for 806.30/807 operations, plus 150,000 indirect jobs.

I found through this study that if 806.30/807 were eliminated, it would endanger 50,000 U.S. jobs in industries supplying components for assembly and/or processing abroad because savings in U.S. duties would no longer be available to U.S. importers, thus forcing them to seek cheaper foreign sources of components and materials.

The U.S. Tariff Commission, in its 1970 study of the "Economic Factors Affecting the Use of Items 807.00 and 806.30 of the Tariff Schedules of the United States" (Report to the President on Investigation No. 322-61 Under Section 332 of the Tariff Act of 1930, September 1970) reached the conclusion that: "the repeal of Items 807.00 and 806.00 of the Tariff Schedules of the United States would not markedly reduce the volume of imports of the articles that now enter the United States under these provisions. Rather, the products would continue to be supplied from abroad by the same concerns but in many cases with fewer or no U.S. components, or by other concerns producing like articles without the use of U.S. materials. . . . Accordingly, repeal would probably result in only a modest number of jobs returned to the U.S., which likely would be more than offset by the loss of jobs among workers now producing components for export and those who further process the imported products."

These conclusions were supported by a later econometric study by the U.S. Department of Treasury: "An Economic Study of the 807.00 Tariff Provision: Its Significance and Consequences" (July 1974). The summary of this study states: "The implication is that the case for the continuance of 807.00 can be made stronger since there are economic benefits for the American consumers and business firms from 807.00 as discussed in the introduction, and the existence of 807.00 has not been a major force in the loss of American jobs."

The United States-Mexico Chamber of Commerce, in an effort to learn whether the same conclusions are still valid in 1976, sent a questionnaire in February 1976 to approximately 175 U.S. firms which have 806.30/807.00 operations in Mexico. Replies have been received from firms engaged in the manufacture of electronic and electrical products, wearing apparel, toys, pianos, transportation equipment, oil drilling equipment and other products. The responding firms varied in size from small family businesses to multinational corporations-from about 10 to 6,000 U.S. employees involved directly in 806.30/807.00 operations.

The firms which provided figures employ a total of over 20,000 workers in plants in the United States that are dependent for their existence upon 806.30/807.00 operations. Of these firms, 39 indicated that by going into 806.30/807.00 operations they had been able to keep U.S. plants in operation that otherwise would probably have had to close due to competition from imports, thereby saving a total of over 14,500 U.S. jobs that would have been lost if they had been forced out of production. In addition, eight of these firms state that their 806.30/807.00 operations have enabled them to increase their exports from the United States, thereby creating 240 new U.S. jobs. While only a minority of the respondents provided estimates of the number of U.S. jobs in other firms that are dependent upon their 806.30/807.00 operations (outside suppliers of components, etc.), in most cases the estimates for numbers of such jobs were about double the number of jobs within the companies directly dependent upon 806.30/807.00.

In response to the question concerning most likely course of action in Items 806.30 and 807.00 are eliminated, more than 20 firms indicated that they would go out of the foreign assembly of U.S. components, which would result in the dismissal of their foreign plant workers, but in so doing might also eliminate a total of 14,000 jobs in their U.S. plants. Another 15 firms indicated that they would move more of their production abroad, and that a total of 3,600 jobs in U.S. plants would be in danger of being eliminated in the process. Only two companies appear likely to increase their U.S.-based operations if Items 806.30 and 807:00 are eliminated, with a gain of 130 U.S. jobs. Four firms indicated that their operations would continue as at present, paying the higher duties on the products assembled abroad.

In our own case, Kay Electronics is engaged in the manufacture of crystal holders and has been since 1943. Our company is a family business typical of many American companies. We have survived several changes of technology in the state of the art of making crystal holders. However, in 1971 we were faced with a drastic decision due to competition from the Japanese. We had lost business in several foreign countries, including Denmark, Australia, and Canada.

We were faced with the decision of either finding a cheaper source of labor in order to stay in business or slowly be forced out of the market and going completely out of business. We elected to try operating under Section 807 in 1972.

At the end of 1971 we employed 221 people-all in the United States. At the end of 1975 we employed 342 people, 164 of which were in the United States. Our experience has been that through the use of 807 we were able to retain 164 American jobs rather than lose all 221.

Should 807 be deleted from the Tariff Act, we would again be placed in the position of taking one of two choices-one, either go out of business, or two, move more of our operation offshore in order to remain in business. At this time we feel we would move the rest of our operation offshore.

Even if we remained as we are and paid more duty, it would be less costly than to move the offshore operations back. We would have in additional duty $6.60/m parts versus more labor costs of $12.67 parts or a cost increase of 11.5% of our selling price. We could not compete with that cost increase. In addition to requesting information which could be tabulated, the Chamber's questionnaire included space for additional information or comments, and many respondents made comments which reinforced the data supplied. A number of these are quoted below:

"The availability of TSUS Item 807.00 and our use of that tariff classification in Mexico has enabled us to remain in the U.S. (name of appliance) market on a competitive basis with items which are fully manufactured outside the United States. . . . Our company began a border operation under tariff schedule 807.00 in Mexico in April of 1973. During the fiscal year ended