The company can exploit an advantage created by foolish protectionist laws to sell cheaper shoes and capture more consumers.
Veronique de Rugy
May. 19, 2016
Corporate welfare takes many forms: a tax break to a particular industry, a tariff against foreign sugar producers to shelter domestic producers from competition, a loan guarantee program for exporters, etc. It can also take the form of lawmakers forcing the Department of Defense to provide New Balance athletic shoes—and only New Balance athletic shoes—for new military recruits.
This story is actually worse than it sounds. Let's start from the beginning: Did you know that the military is required to buy uniforms and boots that are made in the USA? Aside from the unintended effects of such a mandate (hint: it hinders economic growth, costs jobs and makes us relatively poorer), until now it hasn't applied to sneakers because it's difficult to find athletic footwear made in the United States. Most sneakers are made in Asia.
So recruits receive a cash allowance to buy sneakers. Army and Air Force recruits may choose from 14 different variations of shoes between men and women at troop stores. More consumer choice is always good, but in this case the health of the troops is also at stake. The military spends $100 million annually to treat injuries to new recruits, with 80 percent treating injuries to lower extremities. Not everyone has the same type of foot, so the wider the choice of sneakers the fewer injuries.
Enter New Balance. The company recently opened factories in Massachusetts and Ohio, where it makes different shoe components. It expects to reap the benefits of being the only sneaker-maker that can claim a 100 percent American-made label. Though consumers may not care about that feature, they'll certainly care about the price of the shoes, which is likely to be cheaper than those made in Asia. That's because shoes made abroad are slapped with a tariff of up to 20 percent. This hidden tax on foreign athletic shoes increases the price for consumers.
This is good for New Balance, which can exploit this advantage created by foolish protectionist laws to sell cheaper shoes and capture more consumers. That was the plan, at least, until the Trans-Pacific Partnership came along. One of the features of the trade deal is that, if ratified, it would reduce trade barriers between Vietnam and the United States by lowering tariffs, including those on imported sneakers. That's good for consumers, who would see a reduction in the price of their footwear.
However, you can see how this free trade development threatens New Balance's made-in-America advantage. Not surprisingly, the company is vocal in opposing the trade deal in order to protect its U.S. factories.
Now enter the Obama administration. It wants the TPP to be ratified and wants dissenters to get in line. This is easy for the federal government, which can buy favor with government privileges—in this case, the promise of a lucrative military contract for being the sole made-in-America producer of athletic footwear. A coincidence? I think not. According to Heritage Action for America's Michael Needham, the company lobbied the military for some time for that exact outcome. It would mean roughly 250,000 American-made shoes annually—and no competition.
Conveniently, Congress adopted an amendment to the National Defense Authorization Act for Fiscal Year 2017 by Massachusetts Democrat Niki Tsongas to force the military to only buy shoes with every component made in the USA—a feature that only applies to New Balance.
It's a good deal for the administration, the company, its lobbyists, and the members of Congress whose districts house the New Balance factories. It's not good for taxpayers (the New Balance shoes are $30 more expensive than shoes currently available at troop stores), and it's not good for new recruits, who went from being able to choose among 14 pairs of sneakers to being able to choose among three pairs and may see more foot injuries as a result.
And that, my friend, is how interest groups are compelled to support things they don't like. They get a government-granted privilege that cheats taxpayers and consumers—our troops, in this case.
Thank goodness there's one lawmaker in Congress who won't tolerate this blatant cronyism. South Carolina Republican Mark Sanford offered an amendment to strip the Tsongas-New Balance language from the NDAA. He told me his main concern is the health of our military, which requires consumer choices, adding, "Besides, when it smells and looks like an earmark, it's probably an earmark." Unfortunately, there will be no vote on Sanford's amendment. He's still fighting, however, and we can expect the Senate to pick up the fight, too. It's not over yet.