There’s been a long-standing debate as to whether import tariffs are useful in either saving or creating American jobs. Over the last several years, I have settled this debate in my own mind, believing it is mere logic that import tariffs do both.
Import tariffs raise the access fee, if you will, for foreign producers to be able to participate in the American market and grab their own share. I’ve found the best analogy to explain why this is necessary is the game of poker. In poker, everyone who sits at the table to share in the same pot has to ante-up the same amount.
Americans don’t ante-up $2 while Mexicans ante-up two pesos. That wouldn’t be fair. The Chinese shouldn’t be allowed to ante-up their own depressed currency pretending it’s monetarily equal to what Americans must ante-up.
The “pot” in this case is the lucrative U.S. market. Everyone wants to sell to us. Still though, even fierce opponents of free trade sometimes disagree on the necessity of import tariffs. Some who advocate a more competitive America say that giving tax incentives to domestic producers is the answer. Others go so far to say that the tax rate for American manufacturers should be zero.
I have always believed, understanding that this complex issue cannot have only one “silver bullet” answer, that the strongest solution is this: Instead of lowering taxes of American producers to make them more competitive with foreign companies (which pay fewer taxes to the U.S. Treasury), which is revenue-negative, we should be raising taxes on foreign producers, which is revenue-positive. In other words, do not lower our standards to theirs; raise their standards to ours.
Reducing taxes to zero sounds salivating, but that doesn’t help pay for the cost of government. Over 75 percent of all federal spending goes to pay for Social Security, Medicare, defense, education, farm subsidies, highways, parks, and interest on the national debt. Polls show that most Americans are against “government spending” but still strongly back these programs. It’s difficult to explain how one can rally against taxes and yet support the benefits those same taxes would pay for.
Despite the popular rallying cry these days against government in general and calls to “starve the beast,” there are such things as “good” taxes. More taxes collected means more benefits reaped for better public schools, public libraries, and public hospitals. More taxes collected mean a stronger military and national defense, a healthier health care system, and a safer NASA space program. If we collect more taxes we will have cleaner public parks, better construction and maintenance of our roads and bridges, and well-equipped fire and police departments.
Ok, now here comes the proof.
I recently had the pleasure of talking to Harry Kazazian, CEO of Exxel Outdoors, whose company makes sleeping bags under the brand names Suisse Sport, American Trails, Disney, and Hello Kitty. Exxel currently has a 30 percent share of the American market, has a 250,000-square-foot facility in Haleyville, Ala., and produces about 2 million family-style sleeping bags a year.
Exxel began its journey purchasing a facility from Brunswick, which was slated for closure at the time, in 2000. The original plan was to take the customer list and ship equipment to their Mexico plant. But Exxel decided to take the long-term investment approach and found ways to produce sleeping bags for 3 percent cheaper than in China, where there was another factory.
Exxel’s ingenuity allowed it to create the most efficient sleeping bag factory in the world. Officials decided to re-open the Haleyville factory, close a Mexico factory, bring more jobs back from China, and hire back most of their American workers. Exxel is a large employer in an Alabama region with 18 percent unemployment and wage rates that are on the upper end of Alabama standards. Exxel also provides affordable and accessible health care for employees and families.
In 2008, the company added 20 percent more American jobs as officials began closing down operations in China with plans to add even more American jobs in 2010 and 2011. They had come quite a long way. In 2005, Exxel made 30 percent of its sleeping bags in American and 70 percent in China. Fast-forwarding to 2010, 80 percent of the company’s sleeping bags are now made in American and just 20 percent are made in China.
But in October 2009 things changed when Exxel discovered there was a 5,000 percent surge in sleeping bags coming into America from Bangladesh, which unlike China, enjoyed duty free access to the U.S. market. Bangladesh was getting their raw materials from China – also duty free.
Under the U.S. Generalized System of Preferences (GSP) Program, all textiles are exempt from GSP duty free treatment – except sleeping bags – since there is a loophole in the GSP that says sleeping bags are not textiles.
In November 2009, Exxel met with U.S. Trade Representative (USTR) and the Department of Commerce and ultimately filed a petition with the USTR in January 2010. In June 2010 the petition was denied under the thinking that Bangladesh only held a 1 percent share of the U.S. market at the time. Now, Bangladesh holds a 7 percent share, which is sure to grow if nothing is done and relief is not granted.
House Resolution HR 5940 and Senate Bill SB 3823 were recently introduced in Congress to remove sleeping bags from the GSP. There are 12 cosponsors to the House bill to date with seven Republicans and five Democrats.
Let’s move these bills forward before Bangladesh increases its market share to more than 7 percent. Allowing Bangladesh to take a sizeable and potentially death-dealing market share from a promising and innovative American producer is like waiting for enough crash victims to die at an intersection before installing traffic lights.
If the Bangladesh market share goes to 10 percent, then 25 percent, then 50 percent or more, we’re looking at trying to bring back the dead, and it will be ‘game over’ for yet another American industry.
Here’s the proof of my point. With a modest 9 percent tariff on Chinese sleeping bags which afforded some level of protection, Exxel was able to go for a long term investment strategy that enabled it to actually produce less expensively than their Chinese competition. The absence of duty-free treatment for China gave America “most favored nation” status, and if any nation should be given such a status, it should be us.
Once America was open to zero tariffs applied to Bangladesh production, a promising and growing American industry began to decline. And make no mistake; this isn’t an industry that was resting on its laurels, fulfilling some fat-and-happy protectionist scenario which is often the view of angry free traders who regard protectionism as a system that creates inefficient, lazy, American producers.
Let’s get enough legislators on board with HR 5940 and SB 3823 to save a company and an industry that is saving jobs, creating jobs, and doing its part to reduce unemployment in America. And then, let’s take with us the knowledge once and for all that import tariffs have their place is putting Americans, who are the only workers that pay taxes to America, back to work.