Case Study on Nike and New Balance: Trade Policy in a World of Global Chain

Introduction

In 2013, Michael Froman was appointed as the United Trade Representative and tasked with leading the United States negotiating team in the negotiation of fair terms for the U.S in the Trans-Pacific Partnership (TPP). The negotiations were carried out at a period when tariffs on imported footwear were a thorny issue among the stakeholders of the manufacturing industry. To make matters worse, Froman had to pick a position on the topic. The sensitivity of the issue was exacerbated by the fact that Vietnam was a member of the TPP and the second biggest source of imported footwear. Further, Vietnam was advocating for the eradication of tariffs while the labor unions in the U.S. domestic market opposed that on the basis that Vietnam's power emanated from unfair labor practices and subsidies. Among the footwear manufacturers, Nike advocated for the elimination of tariffs to promote production while New Balance supported the reinforcement of tariffs arguing that any other move would lead to a loss of jobs in the manufacturing sector. This report entails an analysis of the impacts of the removal of tariffs on Nike, New Balance, and the overall U.S. economy. Also, the report entails recommendations for Froman during the negotiations.

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Nike vs New Balance

Unlike the majority of the footwear manufacturers, New Balance does not outsource its production processes and instead provides uniquely customized products "Made in America." On the other hand, Nike outsources its production processes despite having a large domestic workforce of more than 38,000 employees (Brodeur & Asche, 2014). Through the signing of TPP agreement, New Balance sought to protect its five production plants based in the U.S. by advocating for a gradual elimination of the import tariffs. On the contrary, Nike's request for the immediate elimination of the tariffs was supported by the promise that the company would create 10,000 additional jobs. Further, New Balance feared that Maine, a small town where the company is based, would be greatly affected if the TPP removed import tariffs.

Nike's interests appear to align with that of the U.S. economy as perceived by the then President (Obama). In 2015, President Obama echoed Nike's sentiments that the TPP deal would stimulate the footwear sector, result in the creation of high-value jobs, and reduce the operational costs hence increase consumer surplus (Boddewy, 2016). Typically, free trade enhances production efficiency and results in the optimization of comparative advantages. Relating this to the footwear sector, it is unclear which of the stands adopted by New Balance and Nike is in the best interest of the U.S. economy (Boddewyn, 2016). The analysis below seeks to shed light on this issue.

Overview of the Footwear Industry

(Bureau Labor of Statistics, 2017)

Although the U.S. footwear sector has been dominant and recorded steady growth over the years, the statistics in the figure below show that manufacturing jobs reduced by 40% while the administration and office support jobs reduced by 25% between 2003 and 2013. These changes are attributed to an increase in domestic labor wages and stiff competition from countries with low production costs like China (Brodeur & Asche, 2014).

(Nike.com, 2018)

The figure above shows the distribution of Nike's workers around the world. According to Nike, the cost of manufacturing one shoe in Vietnam is about $20-25 while New Balance estimates its cost of manufacturing one shoe in America as 35% more that of Nike (Aeppel, 2013). The low cost of production and competitiveness of Vietnam is attributed to weak labor and environmental regulations and dependence of labor unions on the government. Although the removal of tariffs would mean the establishment of more production plants and increase in wages in Vietnam, it is unclear whether such changes will result in the deterioration of child labor, forced labor, and poor working conditions in sweatshops.

While analyzing the impacts of TPP from the footwear perspective, the new agreement appears to have negative impacts on the lower working class and New Balance. In addition, it is highly likely that the agreement will result in the deterioration of the situation of Vietnam workers since the managers are likely to be tempted to force the workers to put in more hours and recruit underage laborers to increase production. Further, Maine could suffer the same fate as Detroit due to loss of jobs. These reasons underscore the need to examine the quantitative factors surrounding the issue carefully. An investigation shows that despite New Balance being the only prominent shoe company that hires local manufacturers, only 25% of its production is based is in the U.S. Similar to Nike, New Balance has many production facilities in the Asian countries. That is because the minimum wage for U.S. manufacturers is $10 per hour while that of Vietnamese is less than $1 per hour (Bureau of Labor Statistics, 2017). Given that TPP requires that signatories adhere to stipulated labor standards, it is likely that wages in Asian countries will increase. That is supported by a study by Petri, Plummer, and Zhai (2012) on the impacts of TPP. The study also showed that the total number of jobs will not change but employment will move from one sector to another. As such, the labor forces will move from low productive sectors to high productive sectors.

Conclusion

In conclusion, it is likely that TPP will adversely affect some segments of the U.S. workforce especially those with low educational levels and transferable skills. Many of the manufacturing workforce for New Balance belong to this category hence will be adversely affected. Given that what is good for Nike is not good for New Balance, it is difficult to level the playing field. As such, the government should take the responsibility of giving work training to the manufacturing workforce. Also, the government should give subsidies to the industries and towns that rely heavily on manufacturing. As of now, many rumors have been spread about the TPP which makes it difficult to ascertain the truth. As such, the negotiators should perceive the conflict between New Balance and Nike as a marketing technique and instead rely more on official data to make decisions.

References

Aeppel, T. (2013, February 28). New Balance Sweats Push to End U.S. Shoe Tariffs. Retrieved December 20, 2018, from https://www.wsj.com/articles/SB10001424127887323764804578312461184782312

Boddewyn, J. J. (2016). International business-government relations research 1945-2015: Concepts, typologies, theories and methodologies. Journal of World Business, 51(1), 10-22.

Brodeur, S., & Asche, A. (2014). Nike versus New Balance: Trade Policy in a World of Global Value Chains. Retrieved December 20, 2018, from https://hbr.org/product/nike-versus-new-balance-trade-policy-in-a-world-of-global-value-chains/HEC087-PDF-ENG

Bureau of Labor Statistics. (2017, September 9). Footwear Manufacturing - May 2017 OES Industry-Specific Occupational Employment and Wage Estimates. Retrieved December 20, 2018, from https://www.bls.gov/oes/2017/may/naics4_316200.htm

Nike. (2018). Nike Sustainability - Interactive Map. Retrieved from http://manufacturingmap.nikeinc.com/

Petri, P. A., Plummer, M. G., & Zhai, F. (Eds.). (2012). The Trans-pacific partnership and Asia-pacific integration: a quantitative assessment (Vol. 98). Peterson Institute.