April 14, 2016 3:35PM

These Shoes Were Made for Rent‐​Seeking

New Balance announced this week that it will intensify its lobbying efforts against the Trans-Pacific Partnership after the Department of Defense refused to accept the company’s bid to become the exclusive supplier of shoes for new military recruits.  The news has gotten attention because it hints at how the Obama administration may be bribing companies to support the TPP.  That’s an interesting angle, but the incident also highlights New Balance’s long history of rent-seeking and how they intentionally adopt inefficient business practices to curry favor with the government. 

Unlike its global competitors, New Balance assembles shoes in the United States.  They have a handful of factories in New England that employ about 1400 people.  Only about 25% of New Balance shoes sold in America are assembled in its U.S. factories (the rest are imported), and its Made-in-America shoes are manufactured from approximately 70% domestic material. 

Because New Balance is less dependent on trade than its competitors, it benefits from U.S. tariffs on shoes.  Those tariffs range from 8% to 60%, with the higher rates reserved for cheaper shoes.  The tariffs directly cost American consumers and businesses over $2 billion per year. 

Even though New Balance imports most of the shoes it sells, it has lobbied aggressively to maintain those tariffs—likely because the tariffs impose a relatively greater strain on its competitors.  The TPP would eliminate tariffs on shoes from Vietnam, where Nike employs over 350,000 people.

But New Balance’s business model doesn’t depend only on taxing American consumers for doing business with their competitors.  They also want to leverage their American manufacturing as a way to get preferences in government procurement.  That includes using a 75-year-old law to force the Pentagon to buy only New Balance shoes for new recruits.

Under the 1941 Berry Amendment, the Department of Defense may only purchase certain products if they are “wholly of US origin.”  New Balance’s American shoes, remember, are only 70% American, so the Pentagon has been able to provide running shoes for new recruits free of the Berry Amendment’s sourcing restrictions.

A few years ago New Balance decided to try making a 100% American shoe in hopes that the military would then be forced by law to buy only that shoe for all new recruits.  According to the Boston Globe, New Balance “bought a contraption that makes midsoles — a key missing link in its domestic supply chain — and installed the machine, which is the size of a school bus, at its Brighton plant about two years ago in anticipation of the military work.”

However, New Balance’s efforts to use protectionist laws and its leverage in Congress haven’t made the Pentagon actually want to buy its shoes.  Military officials were able to avoid New Balance’s trap by relying on a practical exception to the Berry Amendment that applies when U.S made products “cannot be acquired as and when needed in a satisfactory quality and sufficient quantity at U.S. market prices.”   The Boston Globe reports:

The problem, according to the Department of Defense, is that none of the three New Balance shoes offered for consideration met the agency’s cost requirements and one didn’t meet durability standards.

New Balance’s vice president of public affairs says the problem is President Obama and excessive bureaucracy: 

We were assured this would be a top-down approach at the Department of Defense if we agreed to either support or remain neutral on TPP. [But] the chances of the Department of Defense buying shoes that are made in the USA are slim to none while Obama is president.

. . .

They’ve put up roadblock after roadblock. Our shoes are ready to go. It’s a bureaucracy run amok.

So, to recap, New Balance went and made their operations even less efficient in an attempt to get access to sweet government money, but the government agency they wanted to force into buying their product resisted.  Now that that avenue seems to have dried up, they are going to stop playing nice on the TPP, redoubling their efforts to prevent the elimination of regressive shoe tariffs. 

It’s all an excellent example of how companies that rely on government-granted privileges, in this case through protectionist tariffs, learn to make rent-seeking a key part of their business model.