July 31, 2008    Volume 15, No. 14

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China Lobby Pushes To Drop Shoe Tariffs, By William Hawkins

By William Hawkins
Senior Fellow, United States Business & Industry Council

Seemingly minor pieces of legislation can embody large principles. The Affordable Footwear Act of 2007 (H.R. 3934) is a case in point. It currently has 156 co-sponsors. Its advocates say the broad bipartisan support is due to the bill's simplicity. It would eliminate tariffs on low-cost footwear made of rubber or plastic.

The bill was introduced by Rep. Joseph Crowley (D-N.Y.) and there is companion legislation in the Senate (S. 2372) from Sen. Gordon Smith (R-Ore.). Another Oregon lawmaker and co-sponsor, Democrat Rep. Earl Blumenauer, told an audience at the Cato Institute July 24 that the bill was an example of how Congress could continue to liberalize trade without having to wait for trade agreements to be negotiated, and without having to add any provisions about labor or environmental standards. Congress could just drop American tariffs unilaterally to help poor countries overseas and poor consumers at home.

The notion that tariffs determine whether shoes are affordable is not, however, supported by the facts. According to U.S. government data, tariffs on average amount to $1.06 per pair of shoes, or only about 4.3 percent of the retail price. This is less than the sales tax paid at the checkout counter. Though tariff rates can be high, the import price of shoes is very low. It is the markups once the shoes are in the country that drive up retail prices. The European Union increased tariffs on shoes from China and Vietnam in 2006. The European Commission found that during 2001-2005, import prices had dropped 27 percent but "consumer prices...[had] remained stale or even risen slightly."

The U.S. imports 98 percent of its footwear. The text of H.R. 3934 claims, "elimination of duties on such products will not negatively affect manufacturing in the United States" because there is no longer a domestic shoe manufacturing industry to protect. In its findings, the bill uses the odd comparison of how much more tariff revenue is earned on shoes than on imported automobiles. The comparison is more a testimony to the failure of trade law to protect the U.S. auto industry, which is under heavy foreign assault and losing thousands of high-paying jobs, than to why taxes should be cut on shoes.

Not all tariffs are protective. Duties also generate revenue. There is nothing in H.R. 3934 to replace the lost revenue (estimated be around $1.2 billion annually). The bill is another example of special interest legislation, the costs of which will be borne by someone else. With the federal deficit again rising, any measure that adds to it only increases the pressure to raise taxes on other activities, such as capital gains, dividends, inheritance, "excess" profits or personal income.

Legislation like the Affordable Footwear Act is not the result of barefoot peasants storming the halls of Congress, but of well-heeled lobbyists representing business clients who hope to put more money into their own pockets. China supplies 73 percent of all U.S. footwear imports, and 80 percent of the rubber and plastic shoes that are the focus of this legislation.

The shoe tariffs have been on the books for decades, so why the sudden interest in dropping them now? The answer is found in what is happening in China. Inflation is rising, including some increases in labor costs. Energy costs are up, both for inefficient domestic production and for transoceanic transportation. And there is increasing international pressure on Beijing to let the yuan rise in value. To the China Lobby, cutting U.S. import duties looks like a way to offset increased costs elsewhere. The United States has already given China over $1 trillion this decade via its trade deficit. Perhaps it is time to think about helping other countries, whose governments do not use the gains from trade to support a military buildup and a foreign policy at odds with U.S. interests around the world.

H.R. 3934 hints at how to do this. The last section of the bill grants Haiti the same preferential treatment for footwear that is provided to members of the Central American Free Trade Agreement (CAFTA). The final push for votes to pass CAFTA in 2005 was based on foreign policy. House Republican Whip Rep. Roy Blunt told Congress Daily that the strongest argument was that CAFTA would create a trade bloc that could fend off Chinese competition, giving protection to regional industry and economic support to fragile democratic governments.

The same can be said for NAFTA. Mexican shoe exports are down 40 percent from 2000 due to Chinese competition. Mexico is extending its duties on Chinese shoe imports to protect is own industry and hopes that it can recover ground in the American market as costs rise in Asia. But it will need the continuing preferences under NAFTA to have a chance. Cutting external tariffs eliminates the benefit of preferential agreements. Directing trade towards neighbors and away from rivals is a strategic objective that should trump the pleading of special interests for tax breaks.

--William Hawkins is a Senior Fellow at the U.S. Business and Industry Council in Washington, D.C.

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