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Global FTAs Poised to Transform Global Footwear Industry

As the global economy is reshaped by several major outstanding free trade agreements, the global footwear industry eagerly anticipates the opportunities these arrangements might bring. If settled, both the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Partnership (T-TIP) could have historically significant ramifications for shoe retailers and manufacturers. However, serious challenges remain, especially regarding the reduction of tariffs.

For example, consider the T-TIP agreement. While the majority of the T-TIP negotiations have thus far focused on harmonizing regulations between the E.U. and the U.S., there has also been considerable discussion regarding the elimination of business-stymieing tariffs, especially regarding footwear. The issue has generally been overlooked in the press since tariffs between the E.U. and U.S. are typically low–averaging less than 3 percent–but for some goods they can be prohibitively higher. U.S. footwear tariffs can be as high as 37.5%, and the E.U. can hit U.S. footwear imports with tariffs that reach 17 percent. Armando Branchini, vice chairman of Altagama, an Italian lobby group that advocates for luxury brands, said, “Destroying tariffs . . . would be very good for small companies in Europe, and especially in Italy, [which has suffered] a long period of economic crisis.”

In the U.S., the level of the import tax varies depending on the type of shoe. Leather dress shoes capture a tariff of 8.5%. The average pair of running sneakers usually commands 20 percent. And, since the great majority of these shoes are imported from countries that do not have a free trade agreement with the U.S., especially China, these duties are unavoidable.

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China remains the dominant footwear maker for the U.S., making 80 percent of the shoes bought by Americans. However, U.S. footwear imports declined 2.7% in 2012. U.S. footwear employment expanded by 1.3% to 1.02 million workers, still below pre-recession levels. And, on average, every American spent $230 on about seven pairs of shoes.

And, the T-TIP isn’t the only major free trade agreement that could transform the global shoe industry. Footwear, Vietnam’s production and exportation of it, in particular, has been a principal issue of discussion during TPP discussions as well. U.S. tariffs on footwear imported from Vietnam have been in place since the 1960s, in response to a seismic shift in sneaker production to Asia, a movement incentivized by low labor costs. The rationale behind the tariffs was that minimum wages and strict labor laws unduly disadvantaged U.S. manufacturers, diminishing their competitiveness in relation to Vietnam.

However, Vietnam is no longer an emerging economy with respect to footwear, now the number two manufacturer behind mammoth-maker China. Those tariffs still remain, though, and average about 10 percent, though in some circumstances they can hit much higher.

Many experts argue that these inflated duties function as a regressive tax on the poorest families who are disproportionately disadvantaged by them. Combined with state taxes and retail markups, it’s not unusual that a pair of children’s boots, priced at $10 when it arrives at the U.S. border, costs more than $30 at the store.

Senator Susan Collins, a Republican from Maine, resoundingly voiced her support. “The TPP agreement must recognize how tariff rates on certain footwear products–in concert with continuing innovation–help to preserve U.S. jobs. Companies like New Balance are simply asking that they be given an opportunity to compete and keep good manufacturing jobs in the United States,” she said.

Matt Priest, President of the Footwear Distributors and Retailers of America (FDRA), said that both TPP and T-TIP are historically rare opportunities to unburden the footwear industry of cumbersome duties. “The U.S. collects $2.5 billion annually in duties which is an astronomical amount, especially when you consider that footwear is almost 100% imported,” he said. “And $178 million of that is from goods imported from the E.U. So any opportunity to lower the barriers to doing business with the E.U. is of great significance.” And Vietnam’s exports are the crucial issue. “The TPP is a very exciting opportunity to eliminate onerous duties on footwear, particularly footwear from Vietnam, our number two supplier in the world. The U.S. collected $364 million in duties from them and a lot more from other TPP countries.”

According to Priest, the TPP in particular could usher in seismic change. He said, “The TPP is a once-in-a-generation opportunity. The Obama administration has been advertising its desire to forge a twenty-first century trade agreement and this is it.”

And while the TPP talks have recently hit some hurdles, Priest remains confident a resolution will be reached relatively soon. “Of course, TPP negotiations have arrived at yet another crucial stage and there are certainly still delicate issues that remain unresolved, particularly between the U.S. and Japan. And when Japan joined the discussions, their entry was met with both excitement and trepidation. And new issues can stall progress. But I wouldn’t say that I’m really all that nervous about a compromise being finally brokered.”

In addition to the T-TIP and TPP, the U.S. Congress has been pushing legislation that would ease cumbersome duties on the importation of footwear. For example, The Affordable Footwear Act (S.1633) is sponsored by Senators Claire McCaskill (D-MO), Pat Roberts (R-KS), Jeff Merkley D-OR), Mike Johanns (R-NE), Roy Blunt (R-MO), Maria Cantwell (D-WA), Jerry Moran (R-KS) and Amy Klobuchar (D-MN). The main purpose of the bill is to assist low income families struggling to purchase affordable shoes due to what many argue is an inordinately high import duty, which can reach 65 percent in some instances. Compare this to the average import tax on consumer goods in general: 1.4%. Since more than 98 percent of all shoes purchased in the US are imported, it’s all but impossible to avoid what some consider to be a hidden tax.

Kevin Burke, President of the American Apparel and Footwear Association, strongly endorses the Affordable Footwear Act. In a press release issued in December, Burke said, “While reshoring efforts are making a measurable impact in the apparel and footwear industry, the vast majority of products are still made outside our borders. Trade agreements with our global partners remain a large part of the sourcing decisions made by executives every day. The average duty rate paid on all imports hovers at just over one percent, yet the average rate for U.S. footwear imports was still more than 10% in 2012 and more than 13% for U.S. apparel imports. As companies continue to diversify away from China, increased utilization of Free Trade Agreements and passage of commonsense legislation such as the Affordable Footwear Act will benefit everyone, from the four million Americans in our industry to hardworking American families who buy clothes and shoes for their children and themselves.”

The fourth round of T-TIP talks will be held in Brussels, beginning March 10. In preparation for the discussions, E.U. Trade Commissioner Karel de Gucht and U.S. Trade Representative Michael Froman will meet in Washington, D.C. on February 17th to clarify the upcoming agenda.

T-TIP negotiations officially began in July 2013. It has largely been negotiated quietly, avoiding the same journalistic scrutiny lavished upon the Trans-Atlantic Pacific Partnership or Pacific Alliance. Nevertheless, the T-TIP negotiations have been gaining ground and, if successfully settled, could have wide-ranging consequences, allowing the U.S. and the E.U. to set common rules between them on emerging trade issues like regulatory standards and regional cooperation.

The primary objective for the fourth round of T-TIP negotiations is to review the progress made in the first three rounds and to prepare each nation’s chief negotiators’ with revised agendas. The stakes for the negotiations are high since the E.U. and U.S. collectively comprise more than 40 percent of global economic output. According to a study issued by the Center for Economic Policy Research, the E.U. could capture an additional $161 billion a year from a fully implemented free trade agreement, mostly on the strength of an anticipated 28 percent rise in exports to the U.S. More than 80 percent of the overall gain for both sides will result from deep cost-cutting, particularly with the removal of regulatory trade barriers, and the liberalization of trade in services and public procurement.