Question: G5

"Nike vs New Balance: Trade Policy in a world of global value chains". It is a case of deciding tariffs and who it benefits in international trade. Nike was producing its products in Vietnam and therefore demanded lowering of tariffs on imported footwear. New Balance on the other hand, was producing a part of its footwear in USA and therefore did not want further lowering of tariffs.

Please read the case carefully, and include the following in your analysis, keeping a central question in mind: "What are the strategic, contextual and ethical challenges underlying modern trade negotiations?"

Note: use of tables, infographics to depict and illustrate your answer and Use citations in ONE of the following:

1. (in-text , ) and end text referencing

Please read the case and answer the following questions:

1. With regard to the elimination of import tariffs on Vietnamese footwear, is what is good for Nike inc. also in America's economic interest? What about new balance?
2. What should U.S. trade representative Michael Froman do bout state tariffs on Vietnamese footwear to level the playing field to allow Americans to compete and win in the global economy? Help him analyse the situation.
3. Drawing on the case and describe the following theoretical perspectives:
4. Comment on Nationality of a firm and its alignment with the economic interests of a country
5. Fair trade vs free trade
6. Describe instruments of trade control that is Tariff and Non-tariff.
7. What is the rationale of government intervention in trade?
   1. Economic
   2. Non- Economic

CASE: "https://hbsp.harvard.edu/tu/1b6dc6a1"

United States Trade Representative (USTR) Michael Froman closed the door of his new office,walkedtohiswindow,andadmiredtheglimmeringWashingtonD.C.skyline.Duringhisillustrious career as a government official, Froman had never wielded such power as he did now:he had just been nominated by President Obama to be the 11^thUSTR, serving as the president'sprincipal advisor, negotiator, and spokesperson on matters pertaining to international trade andinvestment. One of his main responsibilities would be to complete negotiations on the Trans-Pacific Partnership (TPP), an Asian-Pacific trading bloc built upon the pre-existing Trans-PacificStrategic Economic Partnership Agreement between Brunei, Chile, New Zealand, and Singapore.As of 2013, numerous nations had participated in the TPP negotiations, namely the United States,Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore andVietnam(Exhibit 1).

The TPP was the most promising trade liberalization initiative since the Doha round of worldtrade talks, which stalled in 2008, and would cover approximately 40% of the world's GDP.³Themultilateral talks could potentially deliver huge benefits for the U.S. economy, as the TPP wouldprovide American companies with unprecedented market access to key players in the Asia-Pacific,thelargest andfastestgrowing regionintheworld.⁴Furthermore,itwouldallowconsumers and importers to enjoy wider and cheaper access to the goods and services of TPPcountries.

Froman knew that the TPP negotiations would have to be conducted with caution, however;reducing U.S. barriers to trade and investment would put additional pressure on the country'salready frail manufacturing sector. Between 1999 and 2012, while the total number of U.S. jobshad increased by 2.3%, U.S. production occupations had fallen by 31.9% (Exhibit 2). Importcompetition from and offshoring to Asian manufacturing nations such as China and Indonesia -andTPPnegotiatingpartnerVietnam-werewidelyblamedforthedeclineofU.S.manufacturing.When negotiating the TPP, it was therefore imperative for Froman to find the right balancebetween promoting American business interests abroad and protecting American interests athome.

In recent months, industry activists and politicians had focused on the downside risks of the TPPnegotiations for the American footwear industry. U.S. footwear manufacturing had contracted byalmost a third in the last decade due to increased import competition from China and Vietnam,andtariffreductionsonVietnameseimports would likelyacceleratethis decline.

Fromanwasawarethatthe footwearindustry wouldbea majorsticking pointinthe TPPnegotiations. After consulting with various U.S. footwear lobby groups earlier that day, he knewthat even among American companies, there was disagreement on the position the U.S. shouldadopt. The divide was especially wide between two major footwear companies: Nike Inc. andNew Balance. On the one hand, New Balance was strongly opposed to the removal of tariffs onshoes from Vietnam, as they believed this would endanger footwear manufacturing activities inthe U.S. On the other hand, Nike Inc. was adamant that the tariffs on footwear imports fromVietnam were detrimental to the U.S. economy. According to Nike, tariffs have led to higherfootwear prices, which harm U.S. consumers and reduce the competitiveness of U.S. firms. Iftariffs were eliminated, U.S. footwear manufacturers would be able to save on production costsand reinvestthosesavings in modern, high-value-added jobs in America.¹

When he was sworn in as USTR, Froman had promised to use every tool at his disposal to leveltheplayingfieldsothatAmericans couldcompeteandwinintheglobaleconomy.²Yetdiscussions with representatives from New Balance and Nike had shown him that identifying thebest negotiating strategy would be complex and require in-depth analysis of the impact of tariffeliminationonthevarious footwearindustry stakeholders.HisstanceontheTPPfootwear dilemma required urgent deliberation, as the president had summoned all of his advisors to aconference call later that evening and expected them to advise him on the position the UnitedStates should adopt duringtheTPP negotiations.

TheU.S.footwearindustry

Froman had to first consider the U.S. footwear market and industry to determine the impact of theTPP on the domestic economy. The challenges facing the footwear manufacturing industry weresimilar to those of the U.S. manufacturing sector as a whole. Rising wages and heavy competitionfrom low-cost countries were putting a strain on U.S. shoe factories. In 2012, only 13,290 peoplewereemployed inthefootwearmanufacturingindustry, downfrom19,440in2003.Thisdecrease was due largely to a 41% decline in the number of production workers (Exhibit 3). Incomparison, office and administrative support occupations in the footwear industry had droppedbyjust 25%, and management occupationshad almost returned to 2003levels.

The decrease in U.S. footwear manufacturing activities contrasts sharply with the steady growthof the U.S. footwear market. It is the world's largest, valued at $71.7 billion in 2012, accountingfor 27.9% of the global footwear market, and projected to continue developing in the short tomediumterm (Exhibit 4).

The main reason for America's manufacturing decline is growing import competition from low-wage countries. Currently, almost 99% of the footwear sold in the United States is imported fromlow-cost manufacturing locations, especially in East and Southeast Asia.¹China alone accountedfor 71.9% of U.S. footwear imports in 2012, while TPP negotiating partner Vietnam, a rapidlydeveloping footwear behemoth, accounted for 10.1% of those imports (Exhibit 5). The pace ofVietnam's growth in the footwear market is staggering: exports to the U.S. jumped an astounding23.8% annually between1997 and 2012, and that trend is expected to continue over the shorttermas wages in Chinacontinueto rise.

Vietnamesefootwear industry

Ever since Vietnam signed the U.S.-Vietnam Bilateral Trade Agreement in 2001 establishing"normal trade relations,"²it has been an increasingly important source of footwear products. Injust fifteen years, Vietnam grew into America's second largest supplier of footwear imports(Exhibit 5). In 2012, about 13% of its exports to the U.S. were footwear products, making this astrategic industryforVietnam.³

VietnamhasaclearfootwearproductioncostadvantageovertheU.S.ANewBalancespokesperson estimated that producing a pair of shoes in the U.S. costs 25-35% more than inVietnam,⁴while a Nike representative estimated that it costs around US$20-25 to produce a pairofNikerunning shoes inaVietnamesefactory.⁵

Low wages are a key driver of this production cost advantage. Earnings in Vietnam are more than20 times lower than in the U.S. A study by the Congressional Research Service concluded thatwages in Vietnam's footwear and apparel manufacturing sector averaged US$0.51 an hour in2012.⁶This is significantlylowerthan inChina.⁷

In addition to low wages, low labour and environmental standards help Vietnamese companieskeeptheirproductioncostsdown.Vietnam hasratifiedeighteen conventionswiththe InternationalLabourOrganization(ILO).¹However,labourunionsinVietnamarenotindependent from the ruling communist party, and workers are not free to create or join unions.Furthermore, official strikes are rendered almost impossible due to government requirements.While collective bargaining exists, it is a relatively new concept and has yet to take root in thecountry. Finally, child labour, forced labour, and long hours are still a problem in Vietnam as thegovernment struggles toenforcelaws prohibiting such working conditions.²

Government support of the country's strategic footwear sector also strengthens Vietnamese firms.Vietnam is officially still a communist country, and its footwear sector is dominated by largestate-ownedenterprisesthatenjoylargegovernmentsubsidiesandextensive support.Forexample, Vinatex, the state-owned textile and apparel consortium, is the tenth largest garmentproducer in the world and currently accounts for40% of the country's apparelproduction, 60%ofitstextileproduction,andcloseto20%ofitstotalapparelandtextileexports.³AccordingtotheNationalCouncil ofTextileOrganizations,Vinatexbenefitsfromelevendifferentgovernment subsidyprograms that includelow-cost loans and freeland.⁴

A final advantage of Vietnam's footwear industry is its heavy reliance on cheap imported yarnfrom China. Like Vietnamese footwear, Chinese yarn is predominantly produced by large state-owned enterprises that receive dozens of direct and indirect subsidies from the government. Theallegedly unfair practices of Chinese yarn producers has led many countries, including those intheEuropeanUnion, to imposeantidumpingtariffs onyarn originating from China.⁵

U.S.tradeprotectionism

Comparedtootherindustries,theU.S.footwear sectorishighlyprotectedbyimporttariffs.While U.S. import tariffs on consumer goods average about 1.5%, the average tariff on importedfootwear is approximately 10%.⁶Moreover, they can run as high as 48% of the "free on board"(FOB) value of imported shoes, that is, the commercial value of the shoes before transportationcosts are added to the price (Exhibit 6). These tariff rates substantially affect production costs; forinstance, of their US$20-25 overall production costs, current tariffs on athletic shoes add US$3 toUS$5 to the cost of midrange running shoes from Vietnam, increasing production costs by asmuch as 25%.⁷

While the United States has signed numerous free trade agreements (FTA) over the years, itimposed a "yarn forward rule" to these FTAs. This rule of origin requires that the yarn used inshoemanufacturingbeproduced withintheFTAcountriestoqualifyforthereduced dutiesagreed upon in the trade agreements.¹This serves to protect the U.S. textile industry, a bat tered yet significant component of the manufacturing sector. Textiles are a US$53 billion industry thatemployed almost 240,000 workers in 2011. However, its prominence has declined steadily inrecentyears, with almost300,000 fewerpeopleworkingin thetextile industrythan in 2001.²

NewBalanceversusNikeInc.

While Vietnam was pressuring the U.S. to reduce tariffs on imported footwear, interest groupsinside the country were also pressuring Froman and the U.S. negotiators. Froman's meetings withvarious lobby groups revealed that the widest divide was between American footwear companiesNewBalance andNikeInc.Ontheonehand,NewBalance arguedthatreductionsinimporttariffs wouldbedetrimentaltoU.S.footwear workersandsmaller footwearmanufacturingcompanies. On the other hand, Nike Inc. contended that reducing tariffs on footwear wouldstrengthen U.S. companies, create high-value footwear jobs in the United States, and lowerconsumer prices. Froman was particularly intrigued by this disagreement: which of the twocompanieswasreallydefendingAmericaneconomicinterests?

NewBalanceAthleticShoe,Inc.

New Balance, an American firm headquartered in Boston, Massachusetts, has been a player in thefootwear industry for many years.³It was founded in 1906 under the name New Balance ArchSupport Company by William J. Riley, a British immigrant who had the idea of designing archsupports shaped like a chicken's three-clawed foot to maximize comfort, mostly for policemenand waiters. He later added ancillary products, and, in 1938, designed his first athletic shoe madeof lightweight kangaroo leather with crepe soles for the Brown Bag Harriers Running Club inBelmont, MA. The company continued to grow and was bought in 1972 by Jim Davis, anentrepreneur and marathoner who still owns the firm. By 2012, his business acumen had led NewBalance to becoming the fourth largest athletic footwear and apparel company in the world withannual sales of $2.4 billion in over 120 countries. In addition to its eponymous footwear andclothing brand, the New Balance family also includes the brandsAvaron,Cobb Hill,Dunham,PF-Flyers,Brine,andWarrior.

Throughoutitshistory,NewBalancehasfocusedonfootwearinnovation,resultinginanumberof industry firsts: the first athletic shoe available in multiple widths; the first running shoe madeexclusively for women; and the first shoe to incorporate flared heels for stability. More recently,the company has focused on custom shoes and its "Made in America" businesses. For US$115, aconsumer can order a custom pair of shoes that is made in the United States, choosing anycombination of twenty-six leather colours and five fabric colours for nine different introducing a track-specific running shoe that uses 3-D printing to creat plate on the sole of theshoe that is supposed to enhance performance with every step. These custom shoes can bedelivered in as littleasfourdays and area growingpart ofthefirm'ssales.

Over the years, this focus on innovation has consolidated New Balance's reputation: in 1976, theNew Balance 320 was voted the best running shoe byRunner's World,and the 990 "Made in theUSA" series, producedin the company'sfiveU.S. factories,has beenincreasingly popularamong U.S. consumers ever since it was launched in 1982. In 2008, New Balance inaugurated astate-of-the-art research lab next to its Lawrence, MA, factory that is exclusively dedicated toresearchinto athleticfootwear.

Unlike most of its competitors, New Balance does not outsource all of its footwear production toforeign contractors. Rather, ituses a hybrid systemof insourcing andoutsourcing.In NewEngland, for example, New Balance owns five manufacturing plants that primarily produce forlocal markets: 90% of their output is for American consumers, accounting for about a quarter ofthe company's total U.S. sales.¹While New Balance is currently the sole U.S. athletic footwearmanufacturer to producea portion of its shoes in the United States, it also relies heavily onforeign contractors in China,Indonesia, andVietnam.²

New Balance has a number of U.S. suppliers for parts it does not manufacture itself, such asembroidery thread or the leather used in certain shoes (see Exhibit 7 for the various shoe parts).These suppliers, for which New Balance is a major client, employ an estimated 7,000 people inthe U.S.³Moreover, its factories in small U.S. cities are vital to local economies: for instance, inSkowhegan, Maine, a town of 8,500, it is the largest employer in the region and its presencesupports a wide range of small businesses, such as restaurants. The fate of whole towns andcommunities is tied to themanufacturingpresenceofNewBalancein theirregion.⁴

During the consultation meetings with Froman, New Balance reps expressed fierce opposition totariff reductions on Vietnamese imports. According to their spokesperson, Matt LeBretton, it isalready 25% to 35% more expensive to produce in the United States than in Vietnam. A tariffreduction is not necessary to make manufacturing activities viable in Vietnam and would onlychip away at the tariff buffer that allows New Balance to produce in America.⁵This, in turn,would force New Balance to close its U.S. factories and move all of its production facilitiesoverseas. Thousands of jobs would be lost, in addition to hurting the company's U.S. contractorsandthesmall communities in whichthecompany has manufacturingoperations. shoe parts.Andthecompanyistakingcustomizationmuchfurtherthanjusttheshoe'sappearance:itis NikeInc.

Nike Inc. is a public company headquartered in Beaverton, Oregon, and the largest athleticfootwear and athletic apparel company in the world in terms of sales,¹with over $24 billion inrevenues for a total gross profit of over US$10 billion in 2012.²Its high profit margins (43.4% in2012) have been reflected in the price of its shares, whose value increased an average of 17%annually between 2003 and 2013.³Nike Inc. offers a wide variety of products in seven keycategories: running, basketball, soccer, men's training, women's training, action sports, and NikeSportswear.⁴In addition to the Nike brand, it also owns a few other highly popular apparel andsporting equipment brands such as Hurley, Converse, and Bauer Nike Hockey. Nike Inc. directlyemploys 37,715 people worldwide, but indirectly employs a much larger workforce in factoriesowned by contractors who may manufacture products for numerous companies including NikeInc.⁵

Nike Inc. was founded in 1964 as Blue Ribbon Sports by two partners, Phil Knight and BillBowerman. They startedas distributors of Japanese-madeTiger(nowAsics) running shoes, butas the relationship between the firm and its Japanese supplier began to sour in the early 1970s,Knight and Bowerman decided it was time to start manufacturing their own shoes. The new lineof Nike shoes debuted in 1972 for the U.S. Track & Field Trials, where Bowerman's innovativedesign - a very light outsole with waffle-type nubs for traction - was a great success. Then, in1979, Nike Inc. innovated once more by introducing its Nike Air technology in running shoes,paving the way for its IPO a year later. The firm quickly grew to become the industry leader;however, unlike New Balance, Nike Inc. didn't position itself in the booming fitness sector andthuslost ground to its competitors.

These difficulties were overcome by major marketing campaigns in the mid-eighties - first in1985, when Michael Jordan, a young NBA rookie at the time, endorsed the company, and then in1987, when the iconic Air Max commercial featuring the Beatles songRevolutionwas aired. Bythe end of the eighties, Nike Inc. had regained its title of largest footwear company in the world.Marketing then became a large part of Nike Inc.'s business strategy: in 1995, the firm sponsoredthe Brazil National Soccer Team and supplied its uniforms. One year later, a young golfer namedTigerWoodswassignedforareportedannualcompensationof$5million.Thecompanycontinued to expand, innovate, and skilfully market its products throughout the next decade. In2012,it becametheofficial sponsoroftheNational FootballLeague(NFL).⁶

None of Nike Inc.'s 37,715 employees, roughly half of whom work in the United States,⁷arefactory workers. Rather, they are mostly involved in providing headquarter services, designingandengineeringnewequipment,promotingproducts,andsellingtheminNikestores.Aswith most U.S. footwear companies (with the notable exception of New Balance), shoe manufacturinghas been almost completely outsourced to foreign contractors in Mexico, Brazil, Argentina, Italy,Bosnia, India, China, South Korea, Japan, Indonesia, Taiwan, and Vietnam.¹In August 2013, itwasestimatedthatNike'sexternalcontractorsemployedmorethanamillionpeoplein774 factories in 42 countries. Vietnam supplies the most workers to Nike, with over 310,000people producing footwear, apparel, and sporting equipment, followed by China and Indonesia,where contractors employ about 260,000 and 175,000 people respectively. Three quarters ofNike'sglobal workforceislocated in thesethreecountries (seeExhibit 8).

Contrary to New Balance, Nike Inc. was a strong supporter of reducing import tariffs, predictingthat U.S. footwear manufacturers would be able to save on production costs and reinvest theirsavings in modern, high-value-added jobs in the United States. As Erin Dobson, a Nike Inc.spokespersonsaid,"Thequestioncomesdownto,isonekindofjobmoreimportantthananother? What are the jobs for the 21^stcentury? They're not necessarily jobs that existed 30 yearsago."²

Nike Inc. also argued that being able to offshore footwear production without being penalized bytariffs would help to offset rising foreign labour and material costs, which would in turn makefootwearmoreaffordabletoU.S.consumers.AsarguedbyOregon'sRepresentativeEarlBlumenauer, whose constituency is home to Nike employees as well as the U.S. headquarters ofAdidas, keeping the tariffs taxes millions of Americans on their footwear purchases to keep a fewthousand manufacturing jobs.³This argument is especially compelling when one considers that99%ofthefootwearpurchased in theU.S. isproduced in othercountries.

EliminatingFootwearTariffs-ABlessingoraCurse?

Through his numerous meetings with lobbyists, industry spokespeople, and activists, Froman wasable to map the major arguments for and against the elimination of footwear import tariffs underthe TPP. While his determination to level the playing field so that Americans could compete intheglobal economy never faltered,it became obvious to him that no decision would have apurely positive impact on every stakeholder. Numerous realities and potential impacts had to beconsideredsince adopting the wrong position could have ripple effects throughoutthe U.S.economy.

Asthedaylightfaded,Fromanwasstillponderingthevariousstatisticsandviewpoints.Shouldhe side with New Balance and insist that footwear tariff reductions be kept off the negotiatingtable? Or would the elimination of tariffs as advocated by Nike Inc. be more beneficial to U.S.interests? Should the United States impose conditions on Vietnam for reducing footwear tariffs?His phone rang, and the numbers were still dancing in his head as he heard the beep indicatingthathehad joined theconferencecall.

U.S.OccupationsintheFootwearIndustry,2003-2012

Total		Productionoccupations	Office andadministrativesupportoccupations	Managementoccupations
Year	# workers	Averagehourlywage		# workers	Averagehourlywage		# workers	Averagehourlywage		# workers	Averagehourlywage
2003	19,440		12.26		14,040	10.48		1,900	12.25		620	43.72
2004	19,170		13.14		12,120	10.35		2,410	12.79		810	42.77
2005	18,410		13.24		12,170	10.81		2,350	13.00		620	43.38
2006	17,340		13.77		12,300	11.31		1,930	13.51		600	44.66
2007	15,760		13.87		12,150	11.75		1,170	13.42		470	44.14
2008	16,290		14.40		12,650	12.21		1,100	14.47		490	46.56
2009	15,420		14.43		12,030	12.32		980	15.06		440	48.14
2010	13,790		15.89		9,770	12.56		1,170	15.73		470	54.62
2011	13,650		16.25		9,600	12.76		1,260	15.81		470	56.50
2012	13,290		17.61		8,340	12.70		1,420	15.87		590	56.23

GrowthofU.S.FootwearImports,byCountryofOrigin,1997-2012

U.S.Footwearimports		Share of U.S.footwearimports
	(US$Millions)	CompoundAnnual Growth(%)	(%)
Country	1997	2012	1997-2012	1997	2012
China	7,737	17,876	5.74	53.03	71.90
Vietnam	102	2,512	23.83	0.70	10.11
Italy	1,244	1,230	-0.07	8.53	4.95
Indonesia	1,139	982	-0.99	7.81	3.95
Mexico	393	497	1.57	2.69	2.00
Restoftheworld	3,560	1,233	3.62	27.24	7.09

Import Duty on a Pair of Athletic Shoes That Do Not Cover the Ankles withOuterSolesofRubber,Plastics,Leatheror CompositionLeather,andHavea

F.O.B.ValueofMoreThan$6.50

			TariffRate
TextileUpper	HarmonizedSystemCode	MostFavouredNation	NAFTA	KORUSFTA
F.O.B.value < $12	6404.11.89	20% +90 centsperpair	0%	0%
F.O.B.value > $12	6404.11.90	20%	0%	20%
Leather upper	6403.99.90	10%	0%	0%

Nike Inc.'s Manufacturing Network(dataas ofAugust2013)

Globalproduction	Footwearproduction
Country		Workers		Numberoffactories		Workers		Numberoffactories		Workers(Nikebrand)
Vietnam		312,828		70		231,420		29		193,169
China		263,108		213		129,920		38		119,654
Indonesia		174,259		42		131,958		20		117,452
UnitedStates		13,670		65		77		2		0
Total(includingother countries		1,005,547		774		528,509		163		459,307