Trade Adjustment Assistance: Commerce Program Has Helped Manufacturing and Services Firms, but Measures, Data, and Funding Formula Could Be Enhanced

Published by the Government Accountability Office on 2012-11-14.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                               United States Government Accountability Office

GAO                            Testimony
                               Before the Subcommittee on Government
                               Organization, Efficiency, and Financial
                               Management, Committee on Oversight and
                               Government Reform, House of Representatives
For Release on Delivery
Expected at 10:00 a.m. EST
Wednesday, November 14, 2012
                               TRADE ADJUSTMENT
                               Commerce Program Has
                               Helped Manufacturing and
                               Services Firms, but
                               Measures, Data, and
                               Funding Formula Could Be
                               Statement of J. Alfredo Gomez,
                               Acting Director, International Affairs and Trade

Chairman Platts, Ranking Member Towns, and Members of the

I am pleased to be here today to discuss the Trade Adjustment
Assistance (TAA) for Firms program, which is administered by the
Department of Commerce’s (Commerce) Economic Development
Administration (EDA). Over the past decade U.S. imports have almost
doubled, reaching $2.7 trillion in 2011. During the same period, the United
States entered into free trade agreements that liberalize trade with 14
partner countries. Further trade liberalization is being pursued, including a
Transpacific Partnership among 11 nations in the Asia-Pacific region.

Although trade expansion can enhance the economic welfare of all trade
partners, many firms and workers experience difficulties adjusting to
import competition. Congress has responded to concerns about these
difficulties with trade adjustment assistance programs.1 Established in
1962, the TAA for Firms program provides technical assistance to help
trade-impacted, economically distressed firms make adjustments that
may enable them to remain competitive in the global economy. In fiscal
years 2009 through 2012, EDA received $15.8 million annually for the
TAA for Firms program. EDA uses its appropriation for the TAA for Firms
program to fund 11 TAA Centers (center), which provide assistance to
U.S. manufacturing, production, and service firms in all 50 states, the
District of Columbia, and the Commonwealth of Puerto Rico.

Congress amended the TAA for Firms program under that part of the
American Recovery and Reinvestment Act of 2009 known as the Trade
and Globalization Adjustment Assistance Act (TGAAA) of 2009 and
mandated that we review the operation and effectiveness of these
amendments. My testimony is based on our September 2012 report that
examined (1) the results of the legislative changes on program operations
and participation, (2) the performance measures and data that EDA uses
to evaluate the program and what these tell us about the program’s
effectiveness, and (3) how program funding is allocated and spent.

The three other TAA programs focus on workers, farmers, and communities.

Page 2                                      GAO-13-166T Trade Adjustment Assistance
My statement today summarizes our findings on each of the three issues
discussed in our report.2

First, we found that the four changes mandated by the 2009 legislation
contributed to improvements in program operations and increased

   Creation of director and other full-time positions: The creation of a
    director and other full-time positions for the program resulted in
    reduced firm certification processing times for petitions.

   New annual reporting on performance measures: EDA has submitted
    three annual reports to Congress on these performance measures as
    a result of the legislation.

   Inclusion of service sector firms: According to our analysis of EDA
    data, the inclusion of service sector firms allowed EDA to certify 26
    firms not previously eligible for assistance from fiscal years 2009
    through 2011.3

   Expansion of the “look-back” period from 12 months to 12, 24, or 36
    months: Our analysis of EDA data shows that 32 additional firms
    participated in the program from fiscal years 2009 through 2011
    based on the expansion of the look-back period from 12 months to 12,
    24, or 36 months. Prior to the legislative changes, firms were only
    allowed to compare sales and production data in the most recent 12
    months to data from the immediately preceding 12-month period.

 More detail is available in the report, GAO, Trade Adjustment Assistance: Commerce
Program Has Helped Manufacturing and Services Firms, but Measures, Data, and
Funding Formula Could Improve, GAO-12-930 (Washington, D.C.: Sept. 13, 2012). We
conducted our work from July 2011 to September 2012 in accordance with generally
accepted government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis
for our findings and conclusions based on our audit objectives. We believe the evidence
obtained provides a reasonable basis for our findings and conclusions based on our audit
 Examples of service sector firms assisted by some centers include architectural
engineering firms, telecommunications firms, and software development firms.

Page 3                                          GAO-13-166T Trade Adjustment Assistance
Our review found that from fiscal years 2008 through 2010 EDA certified
and approved an increased number of petitions and business recovery
plans. According to staff at several TAA Centers, the economic downturn
contributed to the increase in firms applying for and receiving assistance
from the TAA for Firms program during this time period because more firms
could demonstrate a decline in sales and employment. Additionally, EDA
officials and TAA Centers staff stated that the 2009 legislative changes
increased interest in and demand for the program by prospective firms.

EDA certified fewer petitions and approved fewer recovery plans in fiscal
year 2011 than in fiscal year 2010. EDA officials and TAA Centers staff
attributed the decline to a lapse in the legislative changes from February
to October 2011; uncertainty regarding the program’s future funding; and
improvement in the economy, which prevented some firms from
demonstrating decreases in employment, sales, and production.

Second, we found that EDA’s performance measures and data collection
for the TAA for Firms program provide limited information about the
program’s outcomes, although our economic analysis found a statistically
significant association between participation in the program and an
increase in firm sales. EDA collects data to report on 16 measures to
gauge the program’s performance, such as the number of firms that
inquired about the program and the number of petitions filed, but most of
these measures do not assess program outcomes. EDA is exploring
better ways to assess the effect of their efforts on firms.

We found that EDA does not systematically maintain data collected by the
TAA Centers on the firms they assist, resulting in gaps in centralized data
that EDA could use to evaluate the program and meet reporting
requirements. We identified the following issues:

   Gaps in centralized data. According to EDA officials, the agency
    maintains databases of information from petitions, such as firm
    location, or information about sales or production, but EDA does not
    maintain the necessary data to conduct a quantitative analysis of the
    program, such as whether a firm is a public or private firm or a
    multiplant firm.

   EDA relies on multiple data requests from the TAA Centers. EDA
    frequently makes additional requests to the centers to obtain their
    program data when preparing required reports.

Page 4                                  GAO-13-166T Trade Adjustment Assistance
   Data requests require verification but can still result in inaccuracies. In
    addition, EDA relies on each of the centers to validate its data.
    However, when we compared EDA’s data with data provided by the
    centers, we identified errors in EDA’s data.

   Lack of guidance results in dissimilar information across centers. EDA
    has also not developed guidance on the format and types of program
    data that centers collect, which has contributed to a lack of
    comparable data on program activities across the centers.

Given the weaknesses we found in EDA’s performance measures and
data collection, we undertook further analysis to determine the impact of
the TAA for Firms program. Our analysis of data collected from the TAA
Centers showed that the program was statistically associated with
increased sales and productivity for manufacturing firms, although some
factors were more strongly correlated with improved performance than
was participation in the TAA for Firms program.

We determined the following:

   There is a small positive and statistically significant relationship
    between program participation and sales. Overall, we estimate that
    the effect of participation in the program was an increase in firm sales,
    ranging from 5 to 6 percent on average, if all other factors are held
    constant. The effect was greater for firms with 300 or fewer
    employees, which account for 95 percent of firms in our sample.
    Using productivity (firm sales divided by employment) as one outcome
    variable, we also found that the effect of the program on productivity
    was about a 4 percent increase.

   As imports rose, sales declined for TAA for Firms clients. Our analysis
    shows that import penetration4 was highly statistically significant and
    most likely had a very negative effect on firm sales. According to our
    estimates, for every 1 percentage point increase in the industry import
    penetration ratio, sales of firms included in our analysis decreased by
    about 16 percent on average.

 Import penetration is defined as the ratio of imports to apparent domestic consumption,
which shows the share of the U.S. market for the particular product served by imports.
Apparent domestic consumption is derived by subtracting net exports (exports minus
imports) from U.S. industry sales or shipments.

Page 5                                          GAO-13-166T Trade Adjustment Assistance
   TAA for Firms participation combined with market growth increased
    firm performance. We found a statistically significant and positive
    effect of industry market growth on firm sales after firms participated
    in the program.5 Specifically, for firms participating in the program, the
    percentage change in firm sales increased as market growth
    increased. For firms in relatively high growth industries, such as
    certain types of metal manufacturing, plastic pipe manufacturing, and
    flooring industries, the combination of participation in the program and
    industry growth affected sales more positively, with such firms
    experiencing a 6 to 10 percent increase in sales.

   Our survey of TAA for Firms participants also showed that the
    program had a positive effect. We conducted a survey of 163 firms
    that had a recovery plan approved in fiscal year 2009 to obtain their
    views about their experience with the program; we received
    responses from 117 of the 163 firms, with a final response rate of 72
    percent. The survey included questions about the TAA Centers, the
    consultants who carried out the projects included in the business
    recovery plans, and the outcomes of the firm’s participation in the
    program.6 More than 90 percent of responding firms reported that
    they were either very or generally satisfied with the services they
    received from their TAA Center and the consultants who performed
    work for them (see fig. 1). Over 80 percent reported that the program
    helped them to identify projects and business process improvements,
    and 62 percent said that the program helped them to identify
    management weaknesses.

 For market growth, we used yearly value of shipments data from the Census Annual
Survey of Manufacturers from 1997 to 2010. For 2011, we estimated a projected value of
shipments. We then estimated market growth rates for each industry (as determined by
the six-digit North American Industry Classification System) associated with each firm by
taking the natural log differences of the value of shipments divided by the change in year.
Log growth rates are often used in economic modeling and empirical analyses.
 For complete survey results, please see Trade Adjustment Assistance: Results of GAO’s
Survey of Participant Firms in the Trade Adjustment Assistance for Firms Program
(GAO-12-935SP), an e-supplement to GAO-12-930.

Page 6                                           GAO-13-166T Trade Adjustment Assistance
Figure 1: TAA for Firms Program Clients Expressed Satisfaction with Program and Results

                                        Notes: The difference between the cumulative percentage and 100 percent represents responses that
                                        were either “didn’t help,” “as satisfied as dissatisfied,” “generally dissatisfied,” “very dissatisfied,”
                                        “don’t know,” or “no response/not applicable.”
                                        Due to rounding, the cumulative percentage adds up to 34.

                                        Page 7                                                  GAO-13-166T Trade Adjustment Assistance
In narrative responses to our survey’s open-ended questions, 22 firm
representatives said that the program helped their business to grow or
improve. In addition, 30 respondents wrote positive comments about their
TAA Center’s attentiveness to their needs and the ease of working with
their center. For the complete results of our survey, please see GAO’s e-
supplement, GAO-12-935SP.

Third, in terms of how funds are allocated and spent, we identified key
weakness pertaining to EDA’s funding formula.
EDA has allocated funding to the 11 TAA Centers using a funding
allocation formula that comprises a set of weighted factors; however, the
formula does not take into account the potential number of firms in need
of the program and differences in costs across the centers. According to a
key standard—beneficiary equity—a funding allocation formula should
distribute funds according to the needs of respective populations and
should take into account the costs of providing program services, so that
each service area can provide the same level of services to firms in need.

EDA’s funding formula divides two-thirds of allocated funding equally
among the 11 centers according to base funding and two fixed factors—
geographic size and number of firms. The funding formula divides the
remaining one-third of allocated funding among the centers according to
three variable factors:

   approved business recovery plans,

   employees in approved recovery plans, and

   firms achieving expected results.7

However, EDA’s funding formula does not include a direct measure of the
number of firms potentially in need of the program. To meet the
beneficiary equity standard, the formula should use reliable and
appropriate measures of need in each state or region.8 Consequently,

 This is measured by the percentage of a center’s clients who reported satisfaction with
the assistance received, and assistance being demonstrated by the center’s payment to a
third-party consultant helping the firm implement a project.
 See GAO, Vocational Rehabilitation Funding Formula: Options for Improving State
Grants and Considerations for Performance Incentives, GAO-09-798 (Sept. 30, 2009).

Page 8                                         GAO-13-166T Trade Adjustment Assistance
centers that may have a greater number of distressed firms due to import
competition potentially receive similar funding as those centers serving a
much smaller number of trade-impacted firms.

EDA’s allocation of funding also does not take into account variations in
TAA Centers’ costs of providing firms assistance, even though to meet
the beneficiary equity standard, a formula should account for differences
in the cost of providing services in each region so that each firm may
receive the same level of assistance. However, we found that centers’
direct and indirect costs to operate the centers varied considerably from
one center to another during the cooperative agreement years 2008 to
2010. Because EDA’s funding formula does not take into account
variations in centers’ costs of providing firms assistance, EDA cannot
ensure trade-impacted firms in different service areas receive the same
opportunities for assistance through the centers. The available evidence
we analyzed suggests there is wide variation in the number of firms
centers are able to assist and the amount of funding they may provide to
implement approved business recovery plans, raising questions about
whether limited program funding is being used as effectively as possible.

In conclusion, although funding for Commerce’s TAA for Firms program,
at less than $16 million, is small relative to the $1.3 trillion rise in imports
over the past decade, our economic analysis and survey results show
that the program has delivered positive results for participating
manufacturing and services firms. We found that these firms receive
individual attention from TAA Center professionals located in their
regions, practical help in developing business recovery plans, and federal
matching funds to pursue projects designed to address competitive
weaknesses and capitalize on strengths.

The changes to the TAA for Firms program that Congress enacted in the
TGAAA in 2009 gave EDA and TAA Center officials more flexibility in
certifying firms, strengthened professional management of the program,
and improved transparency regarding the program’s performance.
However, enhanced accountability can be accomplished only through
better measures of how the program is helping firms adjust to import
competition. Better and more readily retrievable data would give EDA and
Congress a more comprehensive and complete picture of program
activities and enable more meaningful and ongoing analysis of impact.
EDA can do more to ensure that its allocations reflect firms’ and regions’
varied needs for assistance and TAA Centers’ varied costs in providing
this assistance. EDA can also encourage more efficient program
administration by making the cost of services a criterion in its funding

Page 9                                     GAO-13-166T Trade Adjustment Assistance
                     formula and by incentivizing TAA Centers’ cost-containment efforts, so
                     that more funds are available to serve firms.

                     In our report, we recommended that Commerce establish more effective
                     measures of program outcomes, improve its data collection, and allocate
                     funds in a way that considers program needs and costs. Commerce
                     concurred with our findings and recommendations. EDA has recognized
                     many of the weaknesses we identified and has already made initial efforts
                     to address them.

                     Chairman Platts, Ranking Member Towns, and Members of the
                     Committee, this completes my prepared statement. I would be pleased to
                     respond to any questions you may have.

                     For further information on this statement, please contact J. Alfredo
Contacts and Staff   Gomez, at (202) 512-4101 or gomezj@gao.gov. In addition, contact
Acknowledgments      points for our Offices of Congressional Relations and Public Affairs may
                     be found on the last page of this statement.

                     Individuals who made key contributions to this testimony include Kim
                     Frankena, Assistant Director; Christina Bruff; David Dayton; Leah DeWolf;
                     Barbara El Osta; Bradley Hunt; and Erin Preston.

                     Page 10                                GAO-13-166T Trade Adjustment Assistance
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