ECON847 International Trade: Tariff Policies and Case Study Analysis

This case study delves into the complexities of international trade, focusing on the impact of tariff policies, particularly in the context of New Balance and Nike's differing perspectives on tariff reductions on imports from Vietnam. It examines the potential consequences of these policies on U.S. manufacturing, employment, and the broader economy, highlighting the challenges faced by policymakers in balancing domestic interests with the benefits of international trade. The study further explores the historical context of trade barrier removal, the emergence of new obstacles like conflicting standards, and the ethical considerations surrounding trade with low-income countries like Vietnam. It also discusses the potential effects of tariffs on both low and high-skilled workers in the U.S. footwear industry, underscoring the complexities and trade-offs involved in international trade policy decisions. Desklib offers a platform to access similar solved assignments and past papers for students.

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International Trade
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Q1.
New Balance is concerned about the removal of tariffs as it has many suppliers based in
the U.S. that manufacture some of the parts it does not produce for instance the leather used in
particular shoes. Such suppliers have employed close to 7000 workers in the U.S. (Brodeur &
Van Assche, 2014). The factories located in small cities across the U.S. are essential to regional
economies, such as, a small center such as Maine has 8500 individuals and is ranked as the
largest employer in such an area. The presence of Maine boosts a variety of small businesses, for
instance, the restaurants. The future of such towns depends solely on the manufacturing activities
of New Balance in such towns.
The consultation gatherings with Froman, the representatives from New Balance, were
against tariffs reductions on imports from Vietnam. Based on the arguments from their
spokesperson, Matt, it was more than 25% expensive producing in the United States of America
in comparison to a country such as Vietnam (Brodeur & Van Assche, 2014). A reduction in tariff
would not only make production activities in Vietnam viable but also chop off the tariff
motivation that enables New Balance to produce in the U.S. This could make New Balance shut
down its factories in the U.S. and relocate its production facilities overseas where productions
costs were cheap. Thus, thousands of occupations would be lost, and contractors in the U.S
affiliated to New Balance would be hurt. Also, the small communities where the company
operated would be hurt economically.
Based on a report that was released in 2013, it was reported that Nike’s external
contractors had recruit ted more than 1 million workers in the 774 firms spread across the 42
nations. Vietnam led the list of countries that had most workers working for Nike where 310000
of its workers were tasked with producing apparel and sporting equipment (Brodeur & Van

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Assche, 2014). China came second in the list with contractors employing 360000 and Indonesia
came third with only 75000 (Brodeur & Van Assche, 2014). It is estimated that three-quarters of
Nike’s international workforce originate from the above mentioned three countries. As opposed
to New Balance, Nike was a robust advocate of the motion to have the import tariffs reduced.
Nike’s defended its position by asserting that footwear manufacturers in the U.S. would be
relieved of the burden enabling them to save on manufacturing costs. Such savings would allow
Nike to re-invest in what is regarded as high-value-added occupations in the U.S. Nike also
revealed that being able to import footwear production with no penalties imposed in terms of
tariffs would be strategic in offsetting global labour and material costs which would have a ripple
effect of making footwear affordable to the consumers in the U.S.
It was apparent that after Doha global round of trade negotiations, the Trans-Pacific
Partnership would be the most fruitful trade liberalization intervention. The talks could
eventually turn out to deliver substantial benefits for the American economy. This is partly
because TPP was anticipated to deliver unprecedented access to markets for the American
enterprises particularly for key stakeholders in the Asia-Pacific region. The Asia-Pacific region
has been classified as the fasted growing territory globally. Thus, it would enable both the
consumers and importers to tap on the benefits such as broad and cheap access to commodities
from TPP nations.
However, Froman understands vividly that the TPP negotiations have to be carried out
carefully, with extreme care. Nevertheless, reducing trade barriers by the U.S. would exert more
pressure on the manufacturing industry in the U.S. that have been reported to frail. Although in
between 1999 and 2012, the total number of occupations in the U.S. had increased by more than
2%, the manufacturing occupations, on the other hand, had reduced by more than 30%. The

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intensified import competition from offshoring to Asian manufacturing countries, for instance,
China and Indonesia were viewed as the sole reason for the decline in the manufacturing sector
in the U.S.
Froman has to strike a balance when entering the TPP deal, it is imperative for him to
ensure that advancing American business interests overseas merges with protecting the same
business interests in the U.S. In the previous months, the industrial activists alongside politicians
had expressed their worries on the risks that would emerge out of TPP negotiations specifically
for the footwear industry in the U.S.
Q2.
The footwear manufacturing industry had contracted over the past one decade mainly
due to intensified import competition from countries such as China and Vietnam. The reduction
of tariffs on Vietnamese imports would exacerbate such a decline. Vietnam has been reported to
have a comparative cost advantage when it comes to footwear production compared to the U.S. It
is estimated that producing a pair of shoes would cost more than 25% compared to the same pair
generated in Vietnam (Brodeur & Van Assche, 2014). A Nike representative also showed that a
pair of Nike running shoes would cost $20 in a firm located in Vietnam. The low wages in
Vietnam have been attributed to be the primary driver of such a manufacturing cost advantage.
The wages in Vietnam are 20 times lower compared to those in the U.S. In one of the studies that
were conducted by a research service, and it revealed that wages in Vietnam particularly the
footwear and apparel, labourer earned $0.51 per hour and this is even lower compared to what
labourers in China make (Brodeur & Van Assche, 2014).
Following the end of World War II, most of the self-imposed formal barriers to global
trade have been removed. This was possible through the collaborative efforts by the world’s

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trading countries that sought to work through negotiation models stipulated by the General
Agreement on Tariffs and Trade and also the World Trade Organization. The removal of such
trade barriers has, however, led to new obstacles in the context of increased global economic
integration. For instance, some of the national laws implemented for stringent domestic motives
unanimously inhibit global commerce in the face of an economic environment that is integrated.
A law established that gives exclusive rights and monopoly power to one corporation in the
telecommunication industry limits the entry of a foreign company in such a market.
The second obstacle is that of conflict over standards. This entails variations in product
standards, health and safety levels and standards in both labour and environment.
Concerning financial incentives, most of the conflicts over standards originate from the
wide disparities in global income levels (Gandolfo & Trionfetti, 2014). Trade between countries
that are categorized high and low-income nations is based on comparative advantage that moves
nations along their production possibility frontier leading to a higher degree of specialisation in
production. Even though each country stands a chance to gain from such a trade, greater
specialisation leads to winners and losers for such states and blows a whistle as to the issue of
fairness.
The standards of living and economic conditions exhibited in low-income countries such
as Vietnam are different from those in high-income countries such as the U.S. in spheres such as
low wages, more extended working hours, less safe conditions in workstations, unhygienic
industries and low esteem for environmental degradation (Wight, 2015). When trade between
high-and low-income countries occurs, human rights activists begin to question the cheap
commodities imported from low-income countries such as Vietnam. Questions such as whether
children are exploited in the process of production, whether working conditions are safe and

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whether the means of production are environmentally friendly to begin to emerge (Gerber,
2014). The human rights and lobby groups in this context usually advocate for trade barriers such
as tariffs to prohibit imports from such countries as this exerts pressure on the exporting nation to
change its practices.
In the case of Vietnam, there are many instances of low wages, low labour and
environmental standards that enable Vietnam to cut production costs (Boylan, 2014). Vietnam is
also one of those countries that have ratified more than 18 conventions with the International
Labour Organization. The Vietnam labour unions are not autonomous from the reigning party
which happens to be a communist party. Workers in Vietnam are also not allowed to form or join
unions. Well organized official strikes are difficult to organize in Vietnam due to requirements
imposed by the government (Dlabay & Scott, 2011). Even though collective bargaining does
exist, it a nascent concept that has a long way before it takes root in Vietnam. Also, issues such
as child labour, forced labour and long working hours remain a quagmire in Vietnam. The state
strives to enforce regulations that prohibit such poor working environments in Vietnam.
The Vietnamese footwear manufacturing firms continue being strong due to government
support. Vietnam is a communist nation; the footwear industry is still being dominated by large
companies that benefit from government subsidies and support. With the U.S. footwear industry
being protected through import tariffs such tariffs affect costs associated with production as
tariffs on athletic shoes add $3 to the cost of running shoes. Though the U.S. has been strategic
in signing multiple free trade agreements, the government has been reluctant to eliminate tariffs
imposed on footwear and instead imposes a yarn-forward rule to such FTAs.The law dictates that
they yarn used must have come from FTA member countries to qualify for a reduction of levies
as stipulated in the trade agreements.

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How tariffs would affect both low and high skilled footwear workers in the US
Imposing high tariffs in the footwear industry that is characterized by labor-intensive and
low manufacturing may not return occupations to the U.S. However, the footwear industry just
like any other industry, engaging in any reshoring would mean that companies would finance
automation to make manufacturing costs cheap while remaining competitive internationally
(Buckley, 2009). Such a move would have devastating effects on high and low skilled workers as
they would be replaced by the robots. This would mean talent loss among the highly skilled
employees and joblessness among the low skilled workers.
References

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Boylan, M., 2014. Business ethics. Chichester,U.K: Wiley Blackwell.
Brodeur, S. & Van Assche, A., 2014. Nike versus New Balance: Trade Policy in a World of
Global Value Chains. International Journal of Case Studies in Management, 12(4), pp. 1-16.
Buckley, P., 2009. Business history and international business. Business History, 51(3), pp. 307-
333.
Dlabay, L. & Scott, J., 2011. International business. Mason,OH: South-Western Cengage.
Gandolfo, G. & Trionfetti, F., 2014. International Trade theory and Policy. Heidelberg:
Springer.
Gerber, J., 2014. Internation Trade and Labour and Environmental Standards. In: International
Economics. San Diego: Pearson, pp. 182-193.
Wight, J. B., 2015. Chapter 1: Why Ethics Matters. In: Ethics in Economics as an Introduction
to Moral Frameworks. s.l.:Stanford University Press, p. 5.