TPP Creates Footwear of the Future
The final Trans Pacific Partnership (TPP) text is out and the results of economic models are in. TPP will contribute to economic growth and direct employment in the sectors where the U.S. is most competitive – high value manufacturing and innovation.
Trade agreements allow countries to negotiate tariff reductions and standardize regulations in order to increase competition without causing severe structural adjustments such as job losses. The mix of resources every country brings to the table varies, allowing them to make things at different prices. The TPP agreement is unique in that its members represent the whole spectrum of economic development. The agreement includes developing Brunei, which only exports petroleum gas and crude oil; Japan, which competes with the U.S. in more advanced manufacturing; and Vietnam, which has a comparative advantage in textiles and footwear. Reduced barriers divert production to where it is most efficient, allowing American consumers to benefit from lower prices. This will lead to an increase in higher-skilled manufacturing and high tech jobs in the U.S., and an uptick in labor-intensive jobs in Vietnam.
Since the 1930 Smoot-Hawley Tariff Act, the U.S. has imposed significantly higher tariffs on footwear. This Act sparked a trade war causing a 66 percent decline in world trade and exacerbating the Great Depression. U.S. imports from Europe declined by 75 percent and U.S. exports to Europe declined by 66 percent. The high tariffs were reduced significantly on many goods with the 1934 Reciprocal Trade Agreements Act and subsequent trade agreements including the North American Free Trade Agreement (NAFTA), the General Agreement on Tariffs and Trade (GATT), and World Trade Organization (WTO) accession but not on footwear! Today these protectionist footwear tariffs average 10 percentage points more than tariffs for all other goods, and while footwear only accounts for 1 percent of imports by value they account for 8 percent of overall tariff revenue, or $2.7 billion in 2014. These costs are passed on to consumers. Meanwhile U.S. footwear workers shifted to other occupations as the U.S. labor force became more high skilled and highly paid. However, these same jobs that are considered low wage in the U.S. are ladders toward economic opportunity in the developing world. It should be no surprise to learn that the U.S. runs a footwear trade deficit of $26 billion. The footwear production chains are located in countries that have a comparative advantage in low-skill manufacturing, such as China and, more importantly, Vietnam, a TPP member.
TPP will put an end to these excessive tariffs. In the first year of implementation, 418 footwear tariff lines will be eliminated, and the last 18 will be phased out over 12 years. The Footwear Distributors and Retailers of America (FDRA), representing 250 brands, supports TPP. FDRA testified at a public hearing to the U.S. International Trade Commission that TPP will generate $450 million in savings to manufacturers the first year and $6 billion in the first decade. In the competitive world of footwear manufacturing, these savings will become investments allowing Vietnam to dominate the intermediate phase of production of the global value chain and, combined with the reduced cost of imports, create a whole new link.
On May 8, 2015, Nike announced that once TPP is ratified, the company will “accelerate development of new advanced manufacturing and a domestic supply chain to support U.S. based manufacturing…. Create 10,000 manufacturing and engineering jobs in addition to thousands of construction jobs and up to 40,000 indirect supply chain and service jobs in the United States over the next decade.” The eliminated tariff lines will allow Nike to import intermediate footwear products and utilize high-tech U.S. manufacturing to create your Marty McFly power-lace sneakers. Yes, advanced footwear manufacturing is a thing and because it is high tech, the U.S., with TPP, is positioned to lead in it.
The Business Roundtable reports that TPP countries employ 1.6 million Americans, are destinations for 45 percent of U.S. exports, and have invested $720 billion in U.S. businesses. They conclude TPP will only strengthen these trade and investment relationships.
Trade liberalization allows labor and capital to go where each country’s comparative advantage lies, increasing manufacturing efficiency worldwide and lowering the prices that consumers pay for goods. This means adding high skill manufacturing jobs in the U.S. where Americans compete at the top of the global value chains. This is a win for labor, producers and consumers in the U.S., and with America’s TPP partners.