Lines Are Drawn in Debate on U.S. Tariffs
Cynthia Soriano knows the value of a dollar, which is why she shops at a big discount chain where she can pick up a pair of imported shoes for her 6-year-old daughter for $13.99. She doesn’t know that $2 or $3 of that bargain-basement price supports a tariff system that critics say falls hardest on poor U.S. consumers and on developing countries that produce labor-intensive goods.
Those tariffs, designed to protect U.S. jobs by making imports more expensive, are the focus of efforts to influence the Bush administration’s position on global trade.
Pressures on the administration to make changes are coming from several fronts. Recent studies question whether the tariffs save American jobs. Transformations in the U.S. economy have made many industries more dependent on imports and more unhappy with added costs from tariffs. Developing countries are becoming more critical of the U.S. for preaching open borders while maintaining steep barriers to protect domestic industries.
On the other side, some U.S. business interests, including some shoe companies, say tariffs are needed to keep their industries from being eliminated by foreign competition, raising the risk that Americans will lose the capability to make important products.
These arguments will influence the Bush administration as it develops its position in the next year or two during trade talks involving hundreds of countries.
Three decades of trade liberalization have lowered the average U.S. tariff to 1.6%. But the highest fees, ranging from 10% to 48%, are found on inexpensive consumer goods such as clothing, shoes and small household items whose production is concentrated in lower-wage countries. Those tariffs add up to about $20 billion a year.
Critics argue that tariffs have failed miserably in their original purpose: to protect U.S. jobs by making imports more expensive. The U.S. footwear industry, for example, has nearly vanished, with imports claiming 95% of the market. In 1968, U.S. footwear makers operated 1,200 domestic plants employing 250,000 people. Today, there are fewer than 40 companies employing 28,000 people, mostly in specialty items such as work boots.
“This is a case where policy was stuck in one era and the world has moved on without anyone really paying attention,” said Edward Gresser, a trade expert at the Washington-based Progressive Policy Institute, who recently released a report on the subject. “Our tariff system was operating in a way that no one would want it to and it was getting huge amounts of money out of poor people while not protecting jobs.”
But the U.S. tariff system may be about to become unstuck. This year, the American Apparel and Footwear Assn., whose members once represented the most vocal supporters of tariffs, split with other parts of the business community and called for an end to global tariffs in apparel and footwear.
“All my members have had to become importers to survive,” said Fawn Evenson, vice president of global business and services for the Washington-based association. “They’ve shut down all their plants. They see tariffs as a tax on them.”
The U.S. also faces growing pressure from advocates such as Oxfam International, which accuse the industrialized countries of preaching free trade while keeping tariffs high on industries, such as textiles, where cheap labor makes poor countries more competitive. In response to those complaints, the Bush administration agreed to consider eliminating such barriers on apparel and textiles in the latest round of global trade talks, which began in November and are scheduled to end in 2005.
This is far from a done deal, however, because these tariffs are backed by politically influential supporters. They are led by the American Textile Manufacturers Institute, the lobbying arm for the large domestic textile mills, and the Rubber and Plastic Footwear Manufacturers Assn., which represents New Balance Athletic Shoe Inc., one of the few remaining domestic makers of athletic shoes.
Any U.S. trade pact containing a tariff reduction would have to be approved by Congress, where Southern textile makers have successfully fought off attempts to weaken tariffs. “They can negotiate all they want, but Congress has to approve it,” said Charles Bremer, vice president of international trade for the textile manufacturers’ group.
There is more than just jobs at stake, argues New Balance Chairman and Chief Executive James Davis, whose Boston-based firm operates five factories in Massachusetts and Maine. He said the U.S. is at risk of becoming dangerously dependent on foreign goods unless it does a better job of supporting domestic manufacturers.
“What if we went to war with China?” he asked. “Where would we get our shoes?”
Davis insists he is not anti-trade. New Balance employs 2,400 people worldwide, imports three-quarters of its shoes and sells its products in 120 countries. But he said he is committed to keeping some of his production close to home, where he can provide good-paying jobs and better serve retail customers. To increase factory efficiency, Davis divides his production workers into teams and asks them to develop creative ways to narrow their costs so they can compete with imports.
“They know how many minutes it takes to make that shoe,” Davis said, “and how much it is costing us to make that same shoe abroad. They know what their goal is.”
But Davis argues that no matter how many pennies they squeeze out of the production process, New Balance’s $12-an-hour U.S. workers can’t compete without tariff protection against workers in Asia making $2 a day. “We’re able to produce units at a relatively low rate, but it’s still not at the rate it comes from China,” he said.
Supporters of the tariff system say that it is the middlemen and not consumers who will benefit from removal of import charges. Robert Scott, chief economist with the Washington-based independent Economic Policy Institute, said his research has shown that “90% of the changes in import costs were absorbed by distributors and retailers” and there was “very little pass-through” to consumers. Since the costs are spread throughout the consuming public, he believes tariffs are worth keeping even if they save only a small number of jobs. “Tariffs have proven to be relatively insignificant barriers to imports, but nonetheless I think they have retained some jobs,” he said.
Stephen Chu, manager of the U.S. office for Doublestar Group, one of China’s leading shoemakers and a supplier to Payless ShoeSource Inc., Target Corp. and Wal-Mart Stores Inc., agrees that the biggest beneficiaries of tariff elimination are likely to be large retailers. But he said such a move also would ease the pressure on shoemakers, which face stiff pressure to keep wholesale prices low so importers can avoid the highest tariffs. For example, the tariff on imported fabric shoes selling for less than $3 a pair is a whopping 48%, but an additional 90 cents per pair is tacked on for shoes between $3 and $6.
“We must stay below $3, otherwise the cost is too high for them to sell,” said Chu, who was displaying his wares at the recent China Name Brand Products Show at the Los Angeles Convention Center.
Gresser, of the Progressive Policy Institute, says the savings from the elimination of tariffs would be passed on to consumers because the retail sector in the U.S. is so competitive. If that occurred, the biggest beneficiaries would be the poor who bear a disproportionate share of the burden of tariffs.
Tariffs are highest on goods that represent a significant share of purchases for a working-class family, such as apparel and shoes. For example, a single-parent family earning an average $25,095 spends $411 a year on shoes while a two-parent family making $66,913 shells out $480 on shoes, based on the Progressive Policy Institute’s study of tariffs. . That means the single-parent family is spending a much higher percentage of its salary on shoes and shoe tariffs.
In addition, tariffs tend to be higher on the cheaper products purchased by lower-income consumers, Gresser said. Imported shoes made of leather carry a tariff rate of 10% while rubberized canvas shoes have a tariff rate of 48%. Silver-handled forks have no tariff, but cheap stainless steel forks carry 15% tariffs. Women’s silk underwear is taxed at a rate of 2.4% while polyester underwear carries a 16.2% tariff.
But Gresser said few people know they are paying these hidden taxes because they are rolled into the final cost of the goods.
“The poor people who would benefit [from tariff removal] don’t know this policy exists,” he said. “There’s nothing that tells them you’re paying $10 on those shoes and $2.50 is going to the government.”
At the Lincoln Mini Mall, a warren of cramped stalls offering discount clothing and shoes in Los Angeles’ Lincoln Heights, Soriano brightens at the idea that an overhaul of the tariff system might translate into a few more dollars in her pocketbook.
“It does add up,” said the 27-year-old mother, whose family relies on the income of her husband, Jose, a mechanic. “I’m the type of person who if I see a penny, I’m going to pick it up.”
