Recent Trends in Trade Adjustment Assistance 3rd Quarter 2009

Tables and Graphs

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Signs of Stress in the Tennessee Economy?

Tennessee workers and firms are increasingly exposed to international trade. Although growing trade lifts many boats, it also sinks more than a few. One of the few programs for those who are harmed by trade is the Trade Adjustment Assistance (TAA) program, enacted by Congress nearly 50 years ago.  The TAA provides a combination of job training, income support, and tax credits to workers who have lost their jobs as a result of increased imports competition or because production has been shifted overseas. (A similar program exists for specifically NAFTA-related trade as well.)  In this article, we use the TAA program as a sort of “canary in the coal mine” in order to examine the local economy. The larger the usage of the TAA, the greater the stress the local economy may be experiencing. From this perspective, let’s look at the TAA trend in Tennessee.

TAA actions begin with a petition from the affected workers, the company, a union or other authorized representative, or a public agency (usually the state employment agency — in Tennessee, the Department of Labor and Workforce Development). The Labor Department’s Office of the TAA then examines the petition.  If it is found to have merit, the TAA office issues a certification to that effect, and workers are eligible under the program’s auspices. There is some dispute about the true relation between TAA petitions and international trade. Some argue that the number of petitions is inflated because firms and workers will seek help under the TAA even if trade was not really the primary problem. Others respond that the difficulty and length of the TAA process instead leads to fewer petitions than objective trade conditions would warrant. Without trying to judge this argument, one can say minimally that a TAA petition results from some kind of economic hardship and thus, in the aggregate, is signaling . This is probably true even if the petition is rejected.  Rejections are based not on hardship itself, but upon the demonstration of trade as the cause.

Over the past three years, 414 TAA petitions have been introduced from the state of Tennessee.  Petitions rose sharply beginning in mid-2008, spiking in the middle of 2009. This is not conclusive evidence of increasing difficulties, because a liberalization of the program this past May encouraged additional petitions. On the other hand, why was the program liberalized? Presumably due to worsening economic conditions! Nevertheless, the trajectory of the petitions appears, at the moment, to resemble more a sudden spike than it does a secular increase in petitions. The petitions have amounted to the equivalent of one per year for every 50 Tennessee manufacturing establishments. This is only a rough measure, however, because a minority of petitions falls outside the manufacturing sector (for Tennessee, about 13%) and it is possible for the same firm or group of workers to launch multiple petitions. The Armstrong Woods Products plant in Oneida generated seven petitions over the past three years, the most for any operation, and illustrative of the point.

Trade Adjustment Assistance

The Tennessee petition percentage is substantially higher than that for the United States as a whole.  The state generated nearly twice the petitions that one would expect based simply on the number of businesses in the state. A look at the disbursement of TAA monies is also cause for disquiet. In 2009, about $3.1 million of the $165 million appropriated for the program went to Tennessee. This has increased by 27% in the past four years, as the state takes an ever larger portion of total TAA distributions. In other words, Tennessee needs more and more support relative to other states.

We can investigate this further in the regional context. As the accompanying chart shows, Tennessee is the source of more petitions per manufacturing establishment than any of its neighbors, save North Carolina. Its ratio of petitions to establishments is almost twice the nation’s over the past three years. If we use instead the number of manufacturing workers, the story is essentially the same, although the gap between the state and the nation closes a bit.

There are several possibilities for why the state generates relatively more petitions than most of its neighbors and more than America overall. One relates to industry structure. Perhaps Tennessee industries are disproportionately located in the sectors most exposed to international trade or other economic difficulties? In fact, there’s not a lot of evidence to support this. TAA petitions, as one would expect, come mostly from troubled industries. Textiles, furniture, rubber, and the automotive industry stand out. (The pie chart understates the automotive sector’s impact in Tennessee because a good portion of fabricated metal and rubber petitions are auto-related.) However, it does not appear that Tennessee has a greater percentage of its establishments in these more exposed areas.  The state is modestly “heavy” in automotive-related establishments but not so in these other sectors. The bigger piece of evidence against this argument is that Tennessee establishments are more likely to generate TAA petitions across almost all industrial sectors, whether the state is relatively concentrated in the sector or not. It doesn’t look like we can blame Tennessee’s greater than average resort to the TAA on its industry structure alone.

Another possibility relates to ownership. Tennessee establishments are more likely to be branch plants, or at least owned out of state, than is generally the case across the United States. A company may be more likely to close or reduce operations at a distant facility than in the state or locale where it is headquartered. If so, it would be these outlying establishments that would be more likely to have need of the TAA program. This could explain a pattern of higher TAA petitions across a number of industries. Over the past three years, the number of branch plants has indeed been reduced across the nation, even while locally owned operations have increased.  All of the southeastern states saw reductions in their number of plants that were owned out of state. These closures were most severe in plants that employ more than 100 workers — the classic assembly plant, for example, that is often thought to be particularly at peril from international trade.

There is some evidence that this is Tennessee’s problem. Overall, out-of-state ownership of Tennessee operations is at the upper end of the southeastern states, and, on a percentage basis, is about a third again as high as for the entire U.S. Among manufacturing establishments, 13.4% in Tennessee are not locally owned. In comparison, across the nation 8.6% are owned outside of the state where they are operated. Since out-of-state operations are more likely to be targeted by a company in trouble, and Tennessee has comparatively more of this type of establishment, this fact probably accounts for the state’s greater use of the TAA petition. On the other hand, the structure of ownership in Tennessee is very similar to the other states in region and does not account for the regional differences we see.* It appears that the regional difference stems from differences in industry structure, while the ownership factor becomes more important in the national comparison.

While the state generates more petitions across most industries, it’s an odd fact that Tennessee’s petition rate is unusually high in those industries that nationally generate the most petitions. The national industry that has the most intense need of the TAA is the textile industry. Tennessee establishments in this industry generate two-thirds again the number of petitions relative to the nation. The disparity is even greater in the next four most TAA intensive industries, where the state typically generates petitions at double the national rate. In other words, many of the state’s requests for TAA funds come from the same industries that demand them nationally but at a much higher rate. Beyond the ownership situation, it’s difficult to conclude why this might be. Some of the explanation may lie in the specific activities of the establishments in question. The rubber industry generates a lot of petitions, but the portion of that industry involved in tire manufacturing generates even more. Perhaps this is the situation. Likely more important is the geographical location of establishments. Tennessee plants are more likely to be located in rural areas than plants nationally.  Given that workers in these areas have fewer alternatives when a plant downsizes or closes, it may be that such establishments are more likely to produce TAA petitions.

TAA Petitions by County

To investigate this hypothesis, we can examine the geographical source of Tennessee’s TAA petitions. The map shows petitions by county per its number of manufacturing establishments. (Lake County currently has no listed manufacturing plants.) As you can see, the most affected counties tend to be those outside the state’s metropolitan areas. This suggests that rural location is an important factor in the petition process, although it may be correlated with industry location as well.

TAA petitions, granted or not, are indicative of economic stress. There is little positive to be said about Tennessee’s disproportionate resort to them. Whether this usage relates to location, ownership, or industry structure, the conclusion is the same.  Relative to much of the nation, the state economy is going through an unusually difficult period.       

* A last possible explanation is that petitions are being encouraged by state or local governments to a greater degree than elsewhere, but there is no evidence for this. Relatively few Tennessee petitions originate, for example, from the Department of Labor and Workforce Development.

Tennessee International Trade Report

The losses were so broad, across industries and countries, that the story is a bit monotonous.

The third quarter of this year produced no surprises. As expected, Tennessee exports were down, and substantially so. The state’s foreign shipments fell by a billion dollars for the quarter, to $5.161 billion. The good news, if you wish to call it that, is that the state at least suffered smaller percentage losses than did the nation overall. And a relatively small loss in October, the first month of the last quarter, suggests that the worst might indeed be over.

The losses were so broad, across industries and countries, that the story is a bit monotonous. Exports fell in 45 of the state’s top 50 markets. In only three were gains significant, and the most spectacular of these gains, Luxembourg, is artificial. State exports to that small nation grew by almost $100 million for the quarter, an almost unheard-of gain. But the medical equipment and pharmaceuticals shipments that produced this gain were simply goods rerouted from Belgium and other European countries. Singapore (aircraft related) and France (whiskey and radioactive chemicals and isotopes) were the other significant markets that turned in positive numbers for the quarter.

Otherwise it was the same story around the world. Exports to Mexico were down 5% (automotive goods), to Canada 12% (computers, electronics, DVDs and games, auto parts), and to Australia 13% (boats and machinery). Latin American shipments fell 20%, with even worse numbers from Central America (down 27%) and the Caribbean nations (down 24%). To show how broad was the export collapse, even the state’s exports of charitable goods, traditionally important in these latter markets, fell by more than 50% for the quarter. Exports to China dropped by $72 million (18%), with cotton bearing the brunt. Trade with Hong Kong and Taiwan fared even more poorly, off by 38% for the quarter. Shipments to Japan fell by 13%, led by losses in auto parts, chemical, and wood pulp exports. The state’s exports to South Korea dropped 17%, while shipments to the Southeast Asian nations were off by 8%. In the European Union, where large losses in chemical, plastics, paper, and machinery exports occurred, Tennessee’s exports fell by 17%. Simply put, there was no place to hide.

The worst-hit export products were generally primary and intermediary goods used by foreign manufacturers. The state’s paper and pulp producers, for example, lost 31% of their foreign sales in the third quarter. Apparel shipments declined by nearly 40%. Waste and scrap sales were down 40% as well, while exports of primary metal goods fell 33%. Cotton lost more than $100 million in exports over the quarter, 62% of its 2008 sales over the same period. Indeed, 11 of the state’s top 100 commodity exports lost more than half of their exports for the quarter. Only that same number, 11, saw any increase in foreign shipments at all.

How long will this continue? As noted, October exports were down 6% from a year ago. This is the best monthly performance in a year. With better economic news seeping out from East Asia and elsewhere, signs are finally pointing up. Given Tennessee’s heavy investment in transportation, chemicals, and medical instruments, however, we must await definitive signs of improved markets in these products before we can anticipate substantial improvement in the state’s export picture.