From Footwear Industry to Trade Policy: Do it or don’t do it?

by Xiaoyi Wang, MAief ’17

Summary: Nike supports the removal of tariffs on footwear for efficient production and lower costs, but New Balance, the sole American footwear brand that manufactures shoes domestically, argues that signing the TPP will bring unemployment in manufacturing industry. This article analyzes the two company and industry, discusses reasons of the disagreement, and makes comments about the issue.

U.S. President Barack Obama delivers remarks on trade at Nike's corporate headquarters in Beaverton, Oregon

U.S. President Barack Obama delivers remarks on trade at Nike’s corporate headquarters in Beaverton, Oregon May 8, 2015. Sports shoe maker Nike Inc put its weight behind Obama’s push for a trade deal with Asian countries on Friday with a promise to create up to 10,000 U.S.-based manufacturing jobs if the pact is approved. REUTERS/Jonathan Ernst

In the spring of 2015, several events regarding the Trans-Pacific Partnership happened in Oregon, headquarter of Nike. On May 8, President Obama visited Nike headquarters and made a speech to support his decision of signing the TPP. Various protests, like ‘Flush the TPP’, by labor unions have been going on at the same time for job losses in manufacturing and other industries.

Nike VS New Balance

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There is another disagreement between two major footwear brands, Nike and New Balance. New Balance, unlike most of its footwear competitors, doesn’t outsource all of its production and offers the unique customized ‘Made in America’ businesses. On the other hand, none of Nike’s 38,000 workers are manufacturing workers. New Balance wants a gradual cut in tariffs to protect its 5 American factories, but Nike supports an immediate cut by signing TPP. Nike has also promised to create 10,000 new jobs if TPP is approved.

New Balance opposes TPP because it will cause manufacturing unemployment, and destroy small Maine towns that hugely depend on footwear factories. Nike, as well as Obama, supports TPP because it well benefit US footwear industry, create high-value jobs, and increase consumer surplus by lowering costs and prices.

Free trade improves production efficiency and optimizes comparative advantages, but in terms of manufacturing and footwear industry, which of the two sides is really defending American economic interest?

Industry Overview

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Despite the steady growth and dominant position of US footwear industry, manufacturing employment experienced a 40% decrease over the decade, while office and admin support jobs only declined by 25%, and management positions almost remain the same. The rising domestic labor wages and fierce competition from low-cost countries like China and Vietnam account for the dramatic manufacturing employment decline.

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Let’s take Vietnam as the outsourcing market for example. Nike estimates that the costs of ‘Made in Vietnam’ shoes are around $20-25, and New Balance estimates that costs are 25-35% higher for ‘Made in America’ shoes. Low labor costs, low labor and environmental standards, and reliance of labor unions on government all contribute to Vietnam competitiveness. While removal of tariff brings more contracts to Vietnam and increases workers’ wages, it is a question whether the increasing demand will worsen the forced labor, child labor, and sweatshop problems in Vietnam.

Thoughts about the Disagreement

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Isali Ruiz formed running shoes on a mold at the New Balance manufacturing plant in Lawrence. BOSTON GLOBE/John Tlumacki

This is an interesting start point to look at TPP, from the footwear manufacturing perspective. At first glance, I was opposed to the new policy as it ignores interests of the lower working class, and hurts New Balance, a great company with social responsibility. Also, I thought that it will worsen Vietnam workers as well because managers will force the labors to work extra hours for higher production, and hire more illegal child labors. Some people even fear that TPP will turn those small Maine towns into the next Detroit.

We should look at quantitative aspects behind the issue closely. Though New Balance is the only major footwear brand that hires US manufacturers, only a quarter of its production comes from the States. New Balance also heavily relies on Asian countries, including China, Vietnam, and Indonesia. In terms of wages, New Balance offers workers about $10 per hour, while Vietnamese workers earn less than $1 per hour. Also, part of the TPP agreement requires partner countries to meet certain labor standards. Otherwise, you are out.

According to researches by Peter A. Petri and Peterson Institute, the projection is that US employment will move from sector to sectors, and won’t change in total numbers. Labor forces tend to move from less productive industries to more productive ones. The study also found significant gains to a country and improvements in wages, both in US and in Vietnam.

It is true that some workforces, usually with lower education level and transferable skills, will be negatively impacted by the trade policy. I believe that it is the duty of the government to give work trainings to manufacturing workers, subsidies to factories and local economy that heavily depends on manufacturing, and enough confidence that certain industries will benefit with the country. More official statistics and research should be published to reveal the sweet or bitter truth behind the partnership. Many rumors have been created by labor unions or some parties. The conflict between Nike and New Balance may be a marketing event, who knows. It will take time to see the true influence after the deal, but currently government subsidies, help, and support should be provided.

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References:

Aeppel, Timothy. “New Balance Sweats Push To End U.S. Shoe Tariffs”. WSJ. N.p., 2016. Web. 10 Apr. 2016.

“Assessing The Trans-Pacific Partnership, Volume 1: Market Access And Sectoral Issues”. PIIE Briefing (2016): 6-30. Print.

Brodeur, Simon, and Ari Van Assche. “Nike Versus New Balance: Trade Policy In A World Of Global Value Chains”. Harvard Business Review (2014): n. pag. Print.

“Footwear Manufacturing – May 2015 OES Industry-Specific Occupational Employment And Wage Estimates”. Bureau of Labor Statistics. N.p., 2016. Web. 10 Apr. 2016.

“How More Business With Nike Could Affect Workers In Vietnam”. Washington Post. N.p., 2016. Web. 10 Apr. 2016.

“New Balance Wants Its Tariffs. Nike Doesn’t”. Bloomberg.com. N.p., 2012. Web. 10 Apr. 2016.

Petri, Peter A, Michael G Plummer, and Fan Zhai. The Trans-Pacific Partnership And Asia-Pacific Integration. Washington, DC: Peterson Institute for International Economics, 2012. Print.

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4 Responses to From Footwear Industry to Trade Policy: Do it or don’t do it?

  1. tamsasabat says:

    The argument that Vietnamese workers are paid less than the global standards and experience below par factory conditions looks convincing while making a case against TPP but I believe we also have to consider a most important economic concept of harmonization of standards. This economic concept calls for a certain level of harmonization as requirement before markets are opened to other countries. European Union is the most recent example of this theory where European commission sets essential health and safety requirements for most of the regulated products. In light of the theory of harmonization, TPP would make sure that the sub-standard conditions in Vietnam are done away with. Apart from this, TPP would eventually provide variety of brands in a certain category to consumers and as stated correctly in the above blog, it will increase consumer surplus. So, all-in-all it is still a win-win situation for both nations. And moreover, I would argue that trade policies encourage market economy which is the right way to allocate resources on the globe.

  2. rnbai says:

    In the footwear industry, New Balance opposes the TPP and thinks that TPP and outsourcing will transfer the US domestic jobs to abroad and cause the manufacturing unemployment. But in the long run, it will provide more job specialization and provide lower cost services to consumers. For the labor-abundant countries, mentioned in the Vietnam, outsourcing will create jobs to those unskilled and under-educated workers in these countries. On the other hand, the more job creation is based on the extremely low labor costs in the sweatshops and deteriorate environment in these countries, which involved in social responsibility problem.

  3. tristazhang says:

    It’s true that US employment will move from sector to sectors, and won’t change in total numbers. Workers will move to more productive industry. But all changes take time. We should also consider time value. But in the long run, consumers could benefit from TPP since companies can reduce costs and provide cheaper products. As competition become fierce, companies will improve productivity and provide various goods and services. In my opinion, government should offer more work training to decrease negative influences on manufacturing workers.

  4. Yixin Zhang says:

    First of all, I really like this blog. It is very appealing and it is very interesting to look at TPP from the footwear industry, especially from the two companies that are familiar to everyone.

    Secondly, speaking of outsourcing, New Balance is only the lesser of the two evils. Three quarters of New Balance’s production are in Asia, only a quarter of it is in the U.S. Obviously, New Balance knows, as well as Nike does, that outsourcing is cost saving for them. New Balance’s emphasis on “Made in Maine” is, from my point of view, a marketing tactic against Nike’s “Made in China”, an effective way to differentiate itself.

    Finally, with all the improvement in communication and logistics worldwide nowadays, people connecting globally is an unstoppable trend. Being part of the trend, free international trade and job outsourcing is inevitable. Although in the short run, TPP aggravates income inequality but in the long run, there will be net gains for the whole economy. The hard issue here is how to divide the net gains among different sectors, different classes to maximize the well being of the whole society. That is what the government should focus on.

    I believe TPP will eventually work out even though temporary turmoil like Trump and Sanders may get in the way from time to time. After all, we human beings are gregarious by nature and, we love being connected.

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