The president wants other countries to embrace free trade, while defending tariffs for domestic textiles.
Trade officials from nine dynamic Asia-Pacific economies begin 10 days of talks today in Dallas, Texas, hoping to finalize the Trans-Pacific Partnership pact by the end of this year. President Obama has said the deal will be “a model not only for the Asia-Pacific but for future trade agreements.” Perhaps, but the president’s ambitious Asian agenda has run smack into protectionist lobbying back home.
The White House is demanding TPP partners, chiefly Vietnam, agree to new rules that would bring transparency and market-oriented efficiencies to their inefficient (and often corrupt) state-owned enterprises. SOEs are indeed a drag on Vietnam, comprising around 38% of the economy. Prime Minister Nguyen Tan Dung has struggled with the problem for years with little result.
Though the U.S. is pushing Vietnam to help itself by reforming SOEs, Hanoi wants something in return. The country is America’s second-largest supplier of clothing, and Mr. Dung’s trade negotiators insist the U.S. get rid of high tariffs on clothing and footwear, which generally range from 18% to 36%.
This is a chance for Mr. Obama to live in a “21st century economy,” as he often says. Unfortunately, he seems to be caught in 18th century mercantilism.
The American president is in tight with the U.S. textile lobby, which supported him in 2008. The industry has benefited from high tariffs and various protectionist schemes since the 1700s. So U.S. trade negotiators have taken a hard line against liberalizing the U.S. rag trade. The Vietnamese know a double standard when they see one, and are incensed. No deal on market access for us, no deal on SOEs, they say.
New Balance’s “Made in America” shoes are mostly made in Asia.
Here’s how the debate plays out in Washington. On the “21st century” side are the mainstays of the American economy. Giants like Boeing, General Electric, Intel, Microsoft, New York Life, Citi and Federal Express strongly support a TPP that would write new competition and transparency rules for Asian government-run corporations. Opposing the TPP deal is one shoe manufacturer in New England that employs about 1,200 Americans, New Balance Athletic Shoe, and a handful of mid-sized textile manufacturers in the American south.
The giants of American manufacturing and finance, which have major offshore operations, can’t get serious consideration from this White House. Mr. Obama—the “Buy American” candidate—stands behind any company like New Balance that vows to keep jobs at home.
New Balance’s advertising boasts that it remains “the only athletic shoe manufacturer still making shoes in the U.S.” It has five factories in Maine and Massachusetts run by a handful of dedicated American workers who are fearful that getting rid of protective tariffs would throw them out of work.
But behind the pro-American propaganda is a harder economic truth. New Balance makes 75% of its shoes in places like Indonesia and China, even some in Vietnam. The remaining 25% come from the New England factories. But most of those sneakers aren’t really “Made in America,” but “Made in the U.S.A. of Imported and Domestic Components,” as the technical label reads. To be the former, at least 70% of the sneakers must be made from components sourced domestically. Company officials declined to comment or provide a detailed breakdown of their Asian-made components.
This much is clear: New Balance imports shoe parts from Asia and then has their American workers glue the shoes together. Without imported components, the American workforce couldn’t make shoes at a competitive price.
Why is New Balance against giving Hanoi trade concessions? Its operations in Vietnam are tiny compared to elsewhere in Asia. But tariff cuts would give a big boost to its competitors, Adidas and Nike, which have significant footprints in Vietnam.
The company’s patriotism feels even flatter if you consider Nike and Adidas, which unashamedly manufacture their footwear in Asia, together employ some 27,000 Americans. This highly paid workforce in marketing, logistics, design and advertising is 22 times New Balance’s American presence.
Not that New Balance is alone in putting phony nationalism ahead of free trade. The National Council of Textile Organizations, whose members are mostly mid-sized textile producers in the American south, has persuaded the White House to insist that all TPP partners agree to “yarn-forward rules of origin” for their clothing and footwear exports.
This means TPP signatories will only qualify for tariff concessions for their exports to the U.S. if they buy their yarns and fabrics from TPP member countries. Translation: The yarn-forward rule of origin would require clothing exporters like Vietnam and Malaysia to buy American, not Chinese fabric.
This mirrors requirements American officials have inserted into preferential trade pacts with Latin America, which has propped up niche markets for the U.S. rag trade. Similar stipulations the U.S. has obtained in other trade pacts, notably with Singapore and Australia, have protected the Latin niches, while not expanding the U.S. rag trade across the Pacific.
To be fair, Mr. Obama also is hardly the first U.S. president to bow to domestic textile interests. But with the TPP, he’s demanding America’s trading partners summon the political will to dismantle their protectionist rackets. As long as he’s unwilling to do the same, we shouldn’t expect much progress toward this trade agreement.