Trade, Tax Issues Linger Ahead of Midterms

NEW YORK — There’s a lot at stake for the footwear industry as next month’s midterm elections could have significant ramifications on tax, trade and currency policies.

Top concerns for industry executives center on finalizing free-trade agreements with countries including Vietnam and Japan, as well as the enactment of bills that would limit and, in the case of the Affordable Footwear Act, even eliminate some of the tariffs levied on domestically sold footwear.

The U.S. is in talks with 11 countries in Asia-Pacific — including Australia, New Zealand, Japan and Vietnam, but notably not China — to finalize the Trans-Pacific Partnership, the cornerstone of President Barack Obama’s economic policy in the region. That deal would be beneficial for increasing footwear activity in countries like Vietnam, the second-largest supplier of shoes to the U.S., and Cambodia. These areas are viewed as attractive alternatives to China, which supplied 81 percent of all footwear imports into the U.S. in 2013 — the lowest rate since 2004 — but which has become more expensive in recent years.

“We’re looking for dramatic footwear supply diversification, and our sourcing managers are asking, ‘Where can we go?’” said Matt Priest, president of the Footwear Distributors and Retailers of America.

Industry players are also eager to alleviate limitations to entering Japan, said Nate Herman, VP of international trade for the American Apparel and Footwear Association. That country caps the number of global leather shoe imports allowed at a mere 12 million pairs, charging a 4,300 yen ($39.36 at current exchange) surcharge per pair thereafter.

“TPP represents our best hope in 50 years to get rid of foreign trade barriers, or at least phase them out,” Herman said. “The size of the Japanese footwear market is about 600 million pairs, so this would make a huge impact.”

Negotiations on TPP have stalled somewhat, however, due in part to Congressional gridlock over reauthorizing trade promotion authority. If granted, TPP would give the president the right to negotiate international agreements that Congress can then approve or disapprove without the ability to amend them.

Republicans generally favor such fast-track privileges for the president, while Democrats have opposed them.

Industry executives suggest that even a flipping of the Senate to the Republican party in the midterm elections, which political pundits believe is likely, will not encourage fast resolutions in these areas.

“[Regardless of whether the Senate flips], the dynamics won’t be that different,” Priest said. “This is more about whether we as an association can navigate through that flip.”

Back home, meanwhile, producers of shoes with rubber and canvas uppers struggle with paying tariffs on non-U.S.-made product; rates range between 37.5 percent and 67.5 percent, higher than that of men’s and women’s leather. These charges were originally imposed as part of the Smoot-Hawley Tariff Act of 1930 to protect domestic producers from overseas competition.

However, with 98 percent of shoes sold in the U.S. now produced overseas, industry insiders argue that the practice is obsolete and places undue strain on low- and mid-income families, the main consumers of such footwear, and especially buyers of children’s shoes.

To that end, groups such as the FDRA support the Affordable Footwear Act, which calls for the temporary elimination of about 35 percent of duties collected.

The FDRA reported that roughly $2.5 billion in taxes were collected on all footwear in 2013. If passed, the act would save American consumers around $2.4 billion annually, the organization said.

Part of the burden has been alleviated in the past by the Miscellaneous Tariff Bill, which temporarily lowers taxes on imported resources, materials and product. However, the most recent bill expired on Jan. 1, 2013, and has yet to be renewed.

The AAFA’s Herman feared that a decision on reauthorizing MTB could be delayed further if Congress entered a lame-duck session following the elections.

“Footwear-specific initiatives tied to larger trade issues like MTB will only move if other issues like TPP move,” he added. “The decision of the election will have an impact on that.”

For their part, footwear company executives weighed in on how overarching policies are affecting their operations.

Greg Tunney of RG Barry Corp. said the company spends about 30 percent of total profits on Smoot-Hawley tariffs. He urged the government to remove the “regressive” tax structure and stop “penalizing” customers in need of inexpensive footwear.

“The lower the price of the shoe, the higher the tariff,” Tunney said. “If you’re a single mother and you’re on a limited income — and you don’t have a choice, you have to buy your kids shoes — she is paying a much higher tax than the rich guy.”

He also expected TPP talks to be fast-tracked once the elections are over, pointing out that the ability to buy products from Vietnam and Cambodia in particular will significantly lower prices for consumers.

However, New Balance VP of public affairs Matt LeBretton disagreed with the notion that such efforts are at all focused on the consumer.

He argued that the money saved from taxes would likely be applied to discounts for distributors and retailers and otherwise “profit making” over lowering consumer prices.

LeBretton also believed that a finalized TPP would ultimately hurt not only domestic footwear companies, which already struggle to compete against less-expensive overseas operations, but also international workers. Companies with overseas factories tend to jump from country to country once costs in one host country rise and compliance standards there become more stringent, such as with China, he explained.

“TPP rewards footwear manufacturers that decided to lay off thousands of U.S. workers to move their factories overseas,” LeBretton said. “The added incentive to not deal with issues like regulations for staff seems completely against the grain of what we stand for.

“If the goal of TPP is to help other people learn how to make things and completely eradicate our ability to make shoes in the U.S., I don’t think that’s a worthy goal,” he added.

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