Monday, December 26, 2016

Your sneakers are a case study in why Trump’s America-first trade policy is nonsense

By Marc Bain of Quartz. Excerpts:
"Americans love their sneakers, and are willing to pay a high price for a pair they love. But what many shoppers don’t know is that a large portion of the markup they’re paying is the result of steep import tariffs imposed by the US government. On a pair of $120 rubber-soled athletic shoes, for example, about $20 of the retail price could be the result of duties the manufacturer had to pay when they landed in the US from an overseas factory.

A combination of protectionist policies and lobbying by US trade groups has kept these tariffs high since the Great Depression, despite import duties for other products being reduced. But those policies, designed to protect US manufacturing, have done little to keep shoe manufacturing stateside. Americans are almost entirely shod in shoes made overseas, mostly in China.

The shoe industry offers an object lesson on the kind of protectionist policies that president-elect Donald Trump has proposed. Though a self-described “free trader,” Trump has pushed a 45% tariff on imported Chinese goods, (though he’s also said it “could be less“), and a 35% tax on US businesses that send jobs outside the country and then try to sell products domestically. The aim is to resuscitate US manufacturing by convincing American companies it will be more cost-effective for them to manufacture their goods at home.

But the sneaker industry, including brands such as Nike, is a perfect example of what happens when these policies fail. Despite the high tariffs on just about every sneaker, high heel, or kid’s shoe worn in the US, domestic production has dwindled so much that today the US imports 98.4% of its footwear, according to the American Apparel and Footwear Association.

“If duties are the way you think you keep jobs in places and keep people competitive, then we are the prime example as to why that’s nonsense,” says Matt Priest, president and CEO of Footwear Retailers and Distributors of America, a trade organization that has pushed to reduce trade barriers. “If duties were the elixir, we would have a million footwear-manufacturing jobs here in the United States because we collect such high duties.”

The results of the policies Trump has advocated for probably wouldn’t endear the president-elect to sneaker-loving Americans, regardless of their political leanings: Instead of bringing jobs back to the US, raising tariffs would likely make shoes even more expensive than they are today.

How tariffs affect the cost of shoes in the US

Today, the trade-weighted average US tariff for footwear is 10.8%, according to the Department of Commerce, making it much higher than average for all industrial products, which is just 1.5%.

Duties on footwear can range quite a bit, from duty free up to 67.5%. But a spokesperson for the US Department of Commerce says the kinds of footwear the US imports most by value have duties of 6% to 20%, and Priest explains that around 20% is the typical rate for an athletic shoe.

These kinds of mass-produced shoes actually face much higher tariffs than luxury dress shoes. Priest says an Italian leather loafer might carry a duty of 8.5%, while many plastic kids shoes are taxed at 48%. The reason stems from historical efforts to protect US industry.

The Smoot-Hawley Tariff Act of 1930 increased import duties on nearly 900 products in an effort to protect US industry at the outset of the Great Depression. Over the decades, many of those tariffs have been reduced or removed altogether—but not on footwear (paywall), particularly shoes made of plastic or with rubber soles."

The effect of those tariffs is multiplied in the markups that happen between manufacturing and the price that consumers pay at retail. Here’s how it works: Let’s say a manufacturer of athletic shoes wants to make its sneakers in China and then import them to the US to sell. At the 20% duty rate typical for athletic shoes, a $25 sneaker will incur a cost of $5. For the manufacturer, the shoe has now cost $30. In order to make money, the manufacturer sells this shoe to a retailer for twice that, or $60. The retailer, which also needs to make money, sells the shoe to a consumer for $120 (and that amount may also incur a sales tax).

“What you’ll notice is that $5 tax, that duty rate at the normal 20%, has been marked up two times,” Priest says. Consumers generally don’t recognize it, but these tariffs are baked into the final price they pay for a sneaker.

Despite tariffs, jobs have still gone overseas

These duties have done little to keep footwear manufacturing from hopping a ship to Asia, however. “The protective tariffs have not served to overcome the enormous differences in labor and other manufacturing costs which give an advantage to production in low cost countries,” explains Fleischaker.

Despite a nearly 50% increase in domestic manufacturing since 2009, the vast majority of Americans’ shoes are made overseas."

But even with higher tariffs in place, the footwear industry, with its labor-intensive, low-skilled manufacturing, isn’t likely to return jobs to the US. In footwear, as in many other industries, any re-shoring would probably mean that companies would invest more in automation to keep manufacturing costs down and stay competitive globally, as Carrier just proved after agreeing to Trump’s push not to move more operations to Mexico.

“If we’re going to see a lot of shoes made here, there’s going to be a lot of robotics in it and very little human labor,” says Matt Powell, the sports industry analyst for research firm NPD Group."

"“Historically, Brazil has tried to protect its domestic footwear business by having high tariffs on all footwear that’s not made in Brazil,” he explains. “What’s ended up happening is that the Brazilian consumer is paying about double what a US consumer would pay for the same shoe.” (His hashtag #nomorejordans presumably refers to a dystopian future in which Nike Jordans become too expensive for most Americans to purchase.)

Argentina, which in 2009 imposed a Trump-like 35% tariff on computers and electronics to protect its local manufacturers, is putting an end to it because it made products such as TVs and cell phones extraordinarily expensive.

If US companies did re-shore manufacturing, prices would also go up due to the much higher costs, particularly for labor, of making goods in the US. New Balance, which is the only sneaker manufacturer to still produce a significant amount of its shoes—about 25%—in the US, charges from $165 up to $399 for its American-made shoes."

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