Web site Railway Age recently reported that the U.S. Congress is moving along legislation that could ban the production of Chinese manufactured railcars in the United States. From our lens, the legislation is yet another effect of escalating trade tensions, and how politically-motivated actions subsume industry market forces.

Background

In October of 2014 we alerted our Supply Chain Matters readers to what we thought was a noteworthy milestone development, namely Chinese designed and branded railway cars appearing in a U.S. subway system. We were one of the first supply chain management media sites to follow this development. Local and State transit agencies had little choice but to seek equipment proposals from global based manufacturers since there has been no U.S. based manufacturer of subway transit cars for a long time. Boston CRRC subway railcars

In March of 2017, we updated readers to the increased momentum that occurred as China’s state-owned railcar producer CNNR aggressively marketed and bid on contracts from major U.S. cities for overdue replacement of highly aged subway railcar fleets with much more modern equipment. The Chinese state-owned producer has subsequently won lowest-bid contracts to supply new railcars to Boston, Chicago, Los Angeles, and Philadelphia. In the case of Boston and Chicago, contracts called for the presence of a local manufacturing assembly facility to support delivery of the new railcars, and that a certain percentage of components be locally sourced in the United States. A U.S. holding company was formed to manage domestic manufacturing. In the case of the Boston subway cars, the initial prototype cars are now being operationally tested on the MBTA Orange line.

With the imposition of steep U.S. tariffs on imported aluminum and steel, including product originating in China, we have wondered aloud as to whether the existing railcar replacement contracts involving these major U.S. cities would be caught in the ongoing trade war. It now appears that this could be a possibility, and taxpayers may have to shoulder the added financial burdens.

Congressional Proposals

According to the Railway Age report penned by its Editor and Chief, both the U.S. Senate and House of Representatives have differing versions of proposed legislation up for consideration.  The legislation includes a broadened ban on the use of Chinese manufactured railcars.  It reportedly stems from concerns from existing U.S. based freight car manufacturers Trinity, Greenbriar and unnamed others, that CRRC might leverage existing or proposed U.S. based subway car manufacturing facilities as a beachhead to expand int freight car market needs as-well, undercutting existing U.S. manufacturers. Noted in the report:

The impetus behind this provision appears to come from the U.S. freight rail car manufacturers (Trinity, Greenbrier, etc.). They have seen how successful CRRC, Chinese state-owned rail company, has been at taking freight railcar market share in other countries, and want to head things off in the U.S. as early as possible. They have apparently decided that the best way to go about this is to prevent CRRC from establishing a beachhead in the U.S. in the transit railcar sector so CRRC can’t build large factories that could then be used to assemble Chinese-manufactured freight railcars as well.”

According to this report, The U.S. Senate version is more precise in language, whereas the U.S. House version prevents any Federal funding from being used to procure any rail or transit asset from any entity owned or subsidized by a country, construed to be the People’s Republic of China.

Regarding existing contracts related to subway car procurements, the report indicates that the Senate version applies to contracts executed after the final enactment of the legislation, presumed to be in the September or October time period.  The House version calls for retroactive impact.  The Senate amendment prevents any expansion of existing railcar replacement contracts executed prior to date of legislation enactment, to include additional rolling stock that were specified in contracts already consummated. That is presumed to include contracted options to purchase additional railcars at a specified cost. Unclear, at least to this author, is whether bans or added tariffs apply to the requirement of needed maintenance and replacement parts over the operational life of the subway cars.

Implications

As noted in our many prior commentaries related to escalating trade conflicts and tariffs, the process increasingly becomes political and protectionist focused.

Yes, prior to the current escalated trade tensions. major U.S. cities had the opportunity to procure new modern subway cars at considerable below market pricing. Arguments can be made, either pro or con, that such opportunities came about because China’s state-owned railway equipment entity wanted to be able to market and secure a broader global market presence for its designed and manufactured railcar equipment. Or, that direct government subsidies led to unfair, below market pricing of such equipment.

Attuned to the political ramifications, city, and state transit authorities such as those in Boston and Chicago, incorporated contract provisions for a certain portion of U.S. sourced supply as well as U.S. sourced jobs in the form of a domestic manufacturing presence. Such demands are common among individual countries to gain access to a domestic market.

Respective taxpayers and transit riders were afforded the opportunity to secure much more equipment for their budget restrained capital outlays. Now, major questions arise as to what the final legislation mandates for these existing equipment supply contracts in terms of either added costs or suspensions of provisions for added contract options to secure additional railcars.

A further implication is that manufacturers with political influence can continue to successfully lobby political leaders for market protections under the umbrella of national security or overall U.S. market competitiveness. Hence, the broader stated objectives for free and fair trade among global nations becomes diluted by the same individual protectionist measures that other countries, such as the U.S., callout as an unfair trade practice. It further opens the question as to other foreign manufacturers will have access to federal and state equipment procurement needs, if such producers are accused of being directly subsidized by government funding. That could include commercial and/or military aircraft.

Thus, the final outcome of this proposed U.S. legislation is one of political posturing, influence and/or protectionism. The goal for expanding domestic jobs and opening up more global markets for U.S. based manufacturers is subsumed by domestic politics.

In the end, jobs and industry expansions are traded in the name of political optics. Workers and taxpayers suffer the economic short or longer-term consequences. consequences.

These are not a formula for insuring multi-industry global competitiveness or supply chain ecosystem vibrancy.

 

Bob Ferrari

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