May 31, 2018

The surprise inclusion in the draft fiscal 2019 Transportation-HUD appropriations act of a provision banning the use of federal transit dollars to purchase transit vehicles from Chinese companies could have enormous implications for transit agencies in Chicago, Boston and Los Angeles – but it’s also about a long-term strategy to prevent Chinese rail car makers from getting into the separate U.S. market for freight rail cars.

The provision would prevent federal transit money from buying any rail cars from the Chinese government-owned CRRC company and would possibly also prevent federal transit bus money from buying any electric buses from the Chinese privately-owned but to some extent government-subsidized BYD company – despite the fact that both companies are capable of complying with current Buy America laws, which mandate that between 60 and 70 percent of total components for the vehicles be made in the U.S. and that the company open a plant in the U.S. for final vehicle assembly.

Section 165 of the draft bill approved by the House Appropriations Committee last week says the following:

None of the funds appropriated or otherwise made available to the Federal Transit Administration under this Act may be used in awarding any contract or subcontract for the procurement of an asset within the mass transit and passenger rail or freight rail subsectors included within the transportation systems sector defined by President Policy Directive 21 (Critical Infrastructure Security and Resilience) including rolling stock, and the ensuing regulations if the entity is owned, directed, or subsidized by a country identified as a priority watch list country by the United States Trade Representative in the most recent report required under section 182 of the Trade Act of 1974 (19 U.S.C. 2242) and is subject to monitoring by the Trade Representative under section 306 of the Trade Act of 1974 (19 U.S.C. 2416).

A few clarifications:

• Funds “otherwise made available to” FTA presumably includes highway money transferred to mass transit through the “flex” transfer process and potentially TIGER or BUILD grant money transferred from the Office of the Secretary to FTA as well.
• The various sub-sectors of the transportation sector under that Obama-era policy directive are defined here. For the mass transit and passenger rail subsection, the asset list includes “terminals, operational systems, and supporting infrastructure for passenger services by transit buses, trolleybuses, monorail, heavy rail—also known as subways or metros—light rail, passenger rail, and vanpool/rideshare.”
• To get on the blacklist, a company must be “owned, directed or subsidized” by a country on two different U.S. Trade Rep. watch lists, which means the People’s Republic of China.

CRRC has had success in the last few years making the lowest bid on contracts for new rail transit cars for U.S. cities. Its initial success was for MBTA in Boston in 2014, where it bid $567 million and won the Orange/Red Line contract (the next lowest bid was $721 million), prompting it to build a plant in Springfield, Mass. for vehicle assembly. It then won a $1.3 billion contract for Chicago’s CTA (prompting a new assembly factory in the Windy City dedicated by Mayor Rahm Emanuel). CRRC won a third contract for L.A. Metro ($647 million) last year as well as a much smaller contract for SEPTA in Philadelphia.

The degree to which CRRC has been able to underbid other manufacturers has caused concern that the subsidies they get from their government owners are allowing them to compete unfairly.

Normally, the solution would be to strengthen the existing Buy America laws, which already have an exemption from WTO tariff rules (since they are government procurements) and which were strengthened under the FAST Act to take the percentage of domestic content up to 70 percent by 2020.

However, the other companies that manufacture subway and rail cars have names like Siemens and Alstom and Bombardier and Hyundai and Kawasaki. Since they aren’t American companies either, simply ratcheting up Buy America percentages won’t necessarily do any good. (The complete lack of a domestic mass transit rail car industry is a big reason why the Obama Administration’s proposal to take the Buy America component standard up to 100 percent was not enacted.) But singling out companies owned by the Chinese government will stop CRRC, particularly if paired with overall national security concerns about Chinese cybersecurity efforts.

Likewise, BYD is one of the leading suppliers of electric buses.  (Surprisingly, Warren Buffett’s Berkshire Hathaway is also a major stakeholder in BYD, having bought an interest nine years ago.) But they have sold at least 165 of their electric buses to U.S. agencies (according to a December 2017 Reuters article), and have just developed the first hydrogen-electric bus, both of which presumably are leading candidates for the annual no-low emission set-aside bus program at FTA.

If the other foreign-owned companies that sell mass transit cars have a vested interest in stopping the growth of CRRC market share, the other backers of the new appropriations provision are less obvious. A May 2016 blurb in The Hill noted that a new group called the Rail Security Alliance that did not, as yet, have a website had just hired its first lobbying firm. (RSA does have a website now.) RSA appears to be an association of interests relating to freight rail car manufacture.

Since then, RSA’s lobbyist-head, Erik Olson, has been traveling the country warning about the implications of continued CRRC contract wins. His op-ed in the Washington Times five months ago alleges that MBTA got such a good bid from CRRC that it decided not to use any federal funding for the procurement, liberating it from Buy America laws and allowing the Chinese share of total components to exceed that Buy America limit. And RSA commissioned a widely-read report from an international economics consulting firm analyzing how CRRC took over the freight rail car industry in Australia and what those economic effects would look like if replicated here in the U.S.

Now, the one issue does not directly relate to the other. While CRRC manufactures both freight and passenger rail cars, there is no FTA money involved in the purchase of freight rail cars by private freight railroads, so the new appropriations language would not, by itself, have any effect on CRRC’s ability to sell freight rail cars in the U.S. But by preventing CRRC from getting a bigger foothold in the subway/passenger rail car market in the U.S., RSA and its members may be trying to prevent CRRC from converting those U.S. subway car assembly plants to freight rail car assembly plants later on.

U.S. rail car manufactures are free to make a complaint to the World Trade Organization to complain about the subsidies given to CRRC, and they might eventually win, but a lot of people might be driven out of business or die of old age before a final WTO decision was made and enforced.

The fact that freight rail car manufacturers are heavily invested in this debate is clear from who sponsored the provision. At the Appropriations markup, subcommittee chairman Mario Diaz-Balart (R-FL) made it clear that Defense Subcommittee chairman Kay Granger (R-TX) was the prime mover, and Granger spoke in favor of the provision. It just so happens that Trinity Industries, the leading U.S. manufacturer of freight rail cars, is headquartered in Granger’s metropolitan area and has major facilities there.

(Aside from Trinity, the other three major U.S. rail car manufacturers are Greenbrier Companies, American Railcar Industries, and (far behind the others) FreightCar America.)

How will this issue shake out when the House bill is brought up for floor consideration in a few weeks? A member from Chicago or Los Angeles or elsewhere may offer an amendment to strike section 165 from the bill. Generally strong GOP support for the underlying provision is likely (no Republicans spoke against it in committee), and on the Democratic side, it is hard to predict how the Democratic votes will go. Organized labor may not take a formal stand – on the one hand, they may represent the workers at the new CRRC plants, but on the other hand, they never saw a strengthening of protections for the U.S. manufacturing sector that they didn’t like, and the prospect of underlying job losses at U.S. railcar manufacturers may worry them.

In negotiations with the Senate, Richard Durbin (D-IL), a senior member of the Appropriations Committee and the Deputy Minority Leader, is expected to lead the fight against the House provision. But while Durbin is much more of a nationally-known figure than Granger, within the confines of an Appropriations conference, Granger may have as much pull as Durbin – she is in the majority, and she is a leading candidate to take over from retiring chairman Rodney Frelinghuysen (R-NJ) next year. (Granger is chairman of the House Defense Subcommittee and Durbin is ranking member of the Senate Defense Subcommittee, so maybe they can settle the issue as part of their Pentagon funding negotiations.)