Nike versus New Balance: Trade Policy in a World of Global Value Chains

Nike versus New Balance: Trade Policy in a World of Global Value Chains

United States Trade Representative Michael Froman closed the door of his new office, walked to his window, and admired the glimmering Washington D.C. skyline. During his illustrious career as a government official, Froman had never wielded such power as he did now: he had just been nominated by President Obama to be the eleventh USTR, serving as the president's principal advisor, negotiator, and spokesperson on matters pertaining to international trade and investment. One of his main responsibilities would be to complete negotiations on the Trans-Pacific Partnership, an Asian-Pacific trading bloc built upon the pre-existing Trans-Pacific Strategic Economic Partnership Agreement between Brunei, Chile, New Zealand, and Singapore. As of two thousand thirteen, numerous nations had participated in the Trans-Pacific Partnership negotiations, namely the United States, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

The Trans-Pacific Partnership was the most promising trade liberalization initiative since the Doha round of world trade talks, which stalled in two thousand eight, and would cover approximately forty percent of the world's gross domestic product. The multilateral talks could potentially deliver huge benefits for the United States economy, as the Trans-Pacific Partnership would provide American companies with unprecedented market access to key players in the Asia-Pacific, the largest and fastest growing region in the world. Furthermore, it would allow consumers and importers to enjoy wider and cheaper access to the goods and services of Trans-Pacific Partnership countries.

Froman knew that the Trans-Pacific Partnership negotiations would have to be conducted with caution, however; reducing United States barriers to trade and investment would put additional pressure on the country's already frail manufacturing sector. Between two thousand and two thousand twelve, while the total number of United States jobs had increased by two point three percent, United States production occupations had fallen by thirty-one point nine percent. Import competition from and offshoring to Asian manufacturing nations such as China and Indonesia - and Trans-Pacific Partnership negotiating partner Vietnam - were widely blamed for the decline of United States manufacturing.

When negotiating the Trans-Pacific Partnership, it was therefore imperative for Froman to find the right balance between promoting American business interests abroad and protecting American interests at home.

In recent months, industry activists and politicians had focused on the downside risks of the Trans-Pacific Partnership negotiations for the American footwear industry. United States footwear manufacturing had contracted by almost a third in the last decade due to increased import competition from China and Vietnam, and tariff reductions on Vietnamese imports would likely accelerate this decline.

Froman was aware that the footwear industry would be a major sticking point in the Trans-Pacific Partnership negotiations. After consulting with various United States footwear lobby groups earlier that day, he knew that even among American companies, there was disagreement on the position the United States should adopt. The divide was especially wide between two major footwear companies: Nike Inc. and New Balance. On the one hand, New Balance was strongly opposed to the removal of tariffs on shoes from Vietnam, as they believed this would endanger footwear manufacturing activities in the United States. On the other hand, Nike Inc. was adamant that the tariffs on footwear imports from Vietnam were detrimental to the United States economy. According to Nike, tariffs have led to higher footwear prices, which harm United States consumers and reduce the competitiveness of United States firms. If tariffs were eliminated, United States footwear manufacturers would be able to save on production costs and reinvest those savings in modern, high-value-added jobs in America.

When he was sworn in as United States Trade Representative, Froman had promised to use every tool at his disposal to level the playing field so that Americans could compete and win in the global economy. Yet discussions with representatives from New Balance and Nike had shown him that identifying the best negotiating strategy would be complex and require in-depth analysis of the impact of tariff elimination on the various footwear industry stakeholders. His stance on the Trans-Pacific Partnership footwear dilemma required urgent deliberation, as the president had summoned all of his advisors to a conference call later that evening and expected them to advise him on the position the United States should adopt during the Trans-Pacific Partnership negotiations.

The United States footwear industry

Froman had to first consider the United States footwear market and industry to determine the impact of the Trans-Pacific Partnership on the domestic economy. The challenges facing the footwear manufacturing industry were similar to those of the United States manufacturing sector as a whole. Rising wages and heavy competition from low-cost countries were putting a strain on United States shoe factories. In two thousand twelve, only thirteen thousand two hundred ninety people were employed in the footwear manufacturing industry, down from nineteen thousand four hundred forty in two thousand three. This decrease was due largely to a forty-one percent decline in the number of production workers. In comparison, office and administrative support occupations in the footwear industry had dropped by just twenty-five percent, and management occupations had almost returned to two thousand three levels.

The decrease in United States footwear manufacturing activities contrasts sharply with the steady growth of the United States footwear market. It is the world's largest, valued at seventy-one point seven billion dollars in two thousand twelve, accounting for twenty-seven point nine percent of the global footwear market, and projected to continue developing in the short to medium term.

The main reason for America's manufacturing decline is growing import competition from low-wage countries. Currently, almost ninety-nine percent of the footwear sold in the United States is imported from low-cost manufacturing locations, especially in East and Southeast Asia. China alone accounted for seventy-one point nine percent of United States footwear imports in two thousand twelve, while Trans-Pacific Partnership negotiating partner Vietnam, a rapidly developing footwear behemoth, accounted for ten point one percent of those imports. The pace of Vietnam's growth in the footwear market is staggering: exports to the United States jumped an astounding twenty-three point eight percent annually between two thousand and two thousand twelve, and that trend is expected to continue over the short term as wages in China continue to rise.