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Puerto Rico Poised to be Part of the National Conversation on Manufacturing

On Friday, President Donald Trump invoked the Defense Production Act, providing the government with broad authority to direct companies to meet national defense needs.  He then ordered Michigan-based General Motors to begin production of life-saving ventilators.

Resident Commissioner Jenniffer Gonzalez Colon (R-PR) similarly sees a possibility to use the Defense Production Act to help Puerto Rico’s economy.

“Through the Defense Production Act we are going to achieve, along with other incentives, bringing more production to Puerto Rico not only in medicines but in manufacturing,” said González, in an interview with El Nuevo Dia.

The Defense Production Act allows the federal government to call on manufacturers to produce goods needed during a national emergency. Gonzalez Colon reported that in her conversations with the White House, the conversation is tending toward increasing Puerto Rico’s part in producing protective gear and other needed goods.

In a joint press conference with Governor Wanda Velazquez Garced and Federal Reconstruction Coordinator Peter Brown, Gonzalez Colon said that they are consulting “with local pharmaceutical leaders in Puerto Rico to address current medical shortages and long-term supply chain security concerns.”

During the drafting of the Tax Cut and Jobs Act of 2017, federal lawmakers considered and ultimately rejected a proposal to create special tax benefits for Puerto Rico manufacturing that would have granted the U.S. territory more favorable tax treatment than what is available in the fifty states and foreign countries.

Earlier this month, Senate Finance Committee Chairman Chuck Grassley (R-IA) reinforced that he would be willing to consider help for U.S. manufacturers nationwide but expressed reluctance to provide special tax treatment for Puerto Rican based manufacturers.

Granting Puerto Rico more favorable tax treatment than what is available for their own constituents could leave members of Congress politically vulnerable in their home states.

Providing nationwide manufacturing incentives is viewed as a more viable approach.  A recent proposal by Sen. Marsha Blackburn (R-TN) would establish Centers of Excellence for manufacturing throughout the country.

Manufacturing in Puerto Rico

The Food and Drug Administration has for some time been expressing concern that the United States is too dependent on China within the medical supply chain. Puerto Rico has 49 FDA-approved pharmaceutical plants in place, and produces not just one quarter of all U.S. pharmaceutical exports, but also significant amount of medical devices.

Puerto Rico’s Purchasing Managers Index  (PMI), the main metric for the health of the manufacturing index, has been volatile as local and world events have shown a roller coaster of highs and lows.

The PMI is complied from data on new orders, production, employment, supplier deliveries, and own inventories.

The most recent data shows a lower number than during the peaks last year, but still higher than most of 2017. Puerto Rico’s manufacturing industry is in need of support, but is also in a position to blossom, similar to other areas of the country that used to have a strong manufacturing base.

In the area of pharmaceuticals, Puerto Rico has the advantage of an educated workforce and many people experienced in the industry. Puerto Rico produces 25% of the pharmaceuticals exported by the United States. This is more than any State. The Island has the cold chain logistics for pharmaceuticals in place. The learning curve would be lower for Puerto Rico than for many other U.S. regions.

As an example, Bacardi Rum has revamped its distillery to produce the type of alcohol needed for hand sanitizer, which is in short supply in some States.

Tax moves?

The prospect of increasing manufacturing on the Island has revived interest in Section 936, a tax deal that gave pharmaceutical companies, among others, financial breaks far out of proportion to the benefits the Island gained. Pharmaceutical companies in particular, according to the Government Accountability Office, received $2.67 in tax breaks for every dollar they invested.

Yet income and employment remained far below that of any state while Section 936 was in force; in fact, during that time income fell from 35% to 32% of the average U.S. income. and the relatively small number of beneficiaries of the law sheltered billions in revenue from taxation.

Nonetheless, there are those who romanticize Section 936 and continue to see special tax advantages as a workable strategy for Puerto Rico. Rep. Chip Roy (R-TX) recently proposed the “Bring Entrepreneurial Advancements To Consumers Here In North America (BEAT CHINA) Act” to “incentivize” U.S. pharmaceutical companies to increase production in Puerto Rico.

In Puerto Rico, former Governor Aníbal Acevedo Vilá has proposed a reduction of taxes on intellectual property.

On the other hand, the Puerto Rico legislature passed a resolution against “any federal legislation, program or response that, at the expense of equal treatment and political power that the majority of Puerto Ricans demand, grant special and different tax treaties and benefits to manufacturing companies operating in Puerto Rico that depend on the continuation of the status of unincorporated territory. This Legislative Assembly does not support the creation of a federal tax haven, for the benefit of great interests to the detriment of equality for all Puerto Ricans.”

Gonzalez Colon has proposed changes that will give equal tax credits to individuals in Puerto Rico and to create a federal tax credit for wages, capital investment, and local purchases.

Forward looking

The Fiscal Oversight and Management Board, instituted under the PROMESA Act, wrote a letter to President Trump encouraging long-range investment in Puerto Rico’s manufacturing sector:

Puerto Rico has long been a major center for pharmaceutical and medical device manufacturing. According to the FDA, 8% of pharmaceutical expenditures by Americans are for products manufactured in Puerto Rico. The sector has been a mainstay of the Puerto Rican economy for decades. There is a well-developed ecosystem of highly skilled employees who have the technical skills needed to work in a highly regulated and safety-oriented operating environment. Puerto Rico is also fully within the customs territory of the United States, and manufacturing is subject to FDA and other federal agency oversight.

The Oversight Board was established by law to create the conditions for fiscal responsibility in Puerto Rico and restore access to capital markets. One element of this mandate has been to take opportunities to support the Government of Puerto Rico in its efforts to pursue prudent actions to promote economic stability and create the conditions for growth.

As the U.S. considers a response to U.S. manufacturing weaknesses, Puerto Rico is poised to be a part of the national conversation.

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