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What Does The Political Battle Over Trade Mean For The Industry?

...on instruments imported from France, Germany, and what is now the Czech Republic, and regular stories in The Music Trades chronicled their European buying expeditions. After World War II, Asia emerged as a major supplier of instruments and electronics. Thanks to major improvements in logistics by FedEx and UPS, cross-border trade has only increased in the ensuing years.

The most visible sign of increased trade is the multitude of music products stamped with a “Made in China” label. Less apparent is the fact that nearly every product in the industry involves a global supply chain. Chinese guitar plants are dependent on spruce from North America, U.S. guitar makers install tuners from Japan and Germany, and many electronic imports contain chips and components from American semi-conductor companies. The issue of trade has heated up on the presidential campaign trail, raising questions such as “Is unfettered global commerce good for American companies, American consumers, the music products industry? And is there some optimal policy prescription?

U.S. politics may be polarized, but when it comes to global trade, there is surprising consensus among the three leading presidential contenders: they’re all against it. Donald Trump argues that crafty Chinese, Japanese, and Mexican officials have made chumps of their U.S. counterparts at the negotiating table. His solution: a blanket 45% tariff on their imports. Bernie Sanders agrees that all previous U.S. trade deals have been “disasters.” His policy prescription differs from Trump’s—“leveling the playing field” by compelling all foreign companies to adopt U.S. environmental and tax labor standards and prevailing wages—but would have a similar effect on the cost of imported goods. Hillary Clinton isn’t as forthright with her trade policy. However, she says that the North American Free Trade Administration (NAFTA) that she and her husband President Clinton championed in the 1990s was “mistaken” and “bad for American families,” and that the Trans Pacific Partnership, currently being pushed by the Obama administration “needs to be re-written.”

If any of the trio were elected, and managed to get their campaign promises enacted, how would it affect the music industry? To make an assessment, we started by comparing imports, exports, and the deficit on a select group of products over the 20-year period, beginning in 1995, a year after the North American Free Trade Agreement (NAFTA) was implemented. During that time, the landed value of imports of guitars, wind instruments, microphones, and instrument strings increased 191%, rising from $327.9 million to $953.8 million. U.S. exports of the same product categories advanced at a slower rate over the same time frame, increasing 140% to $684.2 million from $285.9 million. The disparity in growth rates resulted in a trade deficit that jumped 530% from $42 million in 1995 to $327 million in 2015.

Results varied among different product categories, as illustrated by the accompanying charts. In acoustic guitars, the “trade deficit” narrowed significantly over the 20-year period, from $13.7 million in 1995 to $8.5 million in 2015. U.S. string manufacturers even enjoyed a growing trade surplus with the rest of the world. At the other end of the spectrum, exports of U.S. woodwinds actually decreased between 1995 and 2015, and the “deficit” surged.

These trade flows unquestionably created winners and losers. U.S. guitar makers benefitted from access to foreign markets, resulting in increased employment at U.S. guitar plants over the past two decades. The converse was true for U.S. woodwind manufacturers: low-cost products from Asia resulted in numerous factory closures and job loss. However, viewing trade flows exclusively in terms of factory jobs lost and gained provides an incomplete picture of their impact on the industry and economy at large. Had U.S. borders been sealed since 1995, some factory jobs may have been saved, but it’s doubtful that the music products industry, let alone the buying public, would have been better off.

Take the case of guitars. There is general consensus that it’s impossible to profitably build a guitar in the U.S. with a street price of under $1,000. Leading U.S. manufacturers even limit their production at those price points because the margins are too tight. If Sanders and Trump policies were adopted, dramatically increasing the prices of imported guitars, it’s not clear who would benefit. Would Fender, Gibson, or Martin sell more because a Chinese import that formerly retailed for $500 was now $1,000? Not likely. However, retailers faced with significant across-the-board price hikes, would probably see their revenues and staffing levels contract. Reduced guitar sales would also drag down the sales of a wide range of related U.S.-made products, ranging from method books to effects pedals. And, perhaps fewer would have tbe experience of making music. There’s also a high probability that protectionist measures in the U.S. would prompt foreign retaliation, adversely affecting U.S. exports.

Tariffs or restrictions on imported wind instruments may have saved some U.S. manufacturing jobs. But, would the resulting higher instrument prices reduce participation in school music programs, costing educator and retail jobs and denying children the benefits of a music education? Impossible to quantify with precision, but certainly not implausible. 

Microphone imports outpaced microphone exports in the 1995-2015 time frame, yet U.S. mic exports still managed to increase at a faster rate than the overall U.S. economy. Curbing imports might give U.S. producers a boost in the domestic market, but would their exports suffer due to retaliatory measures? There are no clear answers, but these examples underscore the complexity of crafting a trade policy that produces net economic benefits for the American populace.

The current structure of U.S. music corporations only adds to the complexity. Sales of U.S.-based music product companies totaled $7.3 billion in 2015, accounting for 44.2% of the global market. Virtually all of the top 100 companies could be described as global enterprises. Fender and Gibson have large guitar factories in the U.S., but also source guitars around the world. Harman Professional sources products globally and notches up 51% of its revenues outside the U.S. EMG manufactures pickups in the U.S. but derives a sizable share of its revenues supplying Asian-based guitar makers on an OEM basis. Distribution arms of foreign-based companies such as Yamaha Corporation of America, collectively employ thousands. Would any of these companies or their employees benefit from a restriction of imports to the U.S.? Given that the law of unintended consequences is still very much in force, the results at best would be mixed. Campaign slogans aside, gauging the impact of trade policies with any precision defies the abilities of even the most astute economic forecasters.

Measuring the flow of containers in and out of U.S. ports also doesn’t fully capture the extent of the industry’s global integration. Fender, to cite just one of many companies, sources instruments in Asia, ships them to a European distribution hub, and then sells them across Europe. Revenues and profits from the transactions accrue to the U.S. company and help support sales, marketing, and logistics teams in Phoenix and Los Angeles. Yet the transactions, which aren’t captured in the Commerce Department’s import and export stats,   still support U.S. jobs and benefit shareholders.

Trade has been a hotly contested political issue from the earliest days of the United States. Alexander Hamilton, the first Secretary of the Treasury, argued in favor of high tariffs to protect fledgling domestic industries. His arch rival Thomas Jefferson, first Secretary of State and third President, fiercely opposed them, claiming they would place an undue burden on the agrarian south. The debate has also consistently spilled over to the music industry. Charles Girard Conn, founder of C.G. Conn, was elected to Congress in 1893 where he argued in favor of high tariffs on low-priced brass instruments from Germany. In 1968, U.S. piano and band instrument manufacturers unsuccessfully appealed to the government for tariff protection from low-cost Japanese imports that were flooding the market. U.S. guitar makers had somewhat more success with similar appeals in 1986, seeking protection against Korean imports. They persuaded the International Trade Commission to revoke Korean producers’ duty-free status as a “developing economy,” but the increase to a 7% duty had little impact in the marketplace.

Tariff protections have consistently been ineffectual in the music industry with one notable exception. In the early 1980s, at the urging of Texas Instruments, Fairchild Semiconductor, and Rockwell International, the International Trade Commission charged Japanese manufacturers with illegally dumping Dynamic Random Access Memory Chips (DRAMs) and Static Random Access Memory Chips (SRAMs) into the U.S. market—that is selling below their cost to gain market share. A 50% punitive duty was leveled on Japanese memory chips, to the delight of U.S. chip manufacturers. The response in the music industry was less enthusiastic. 

Overnight, U.S. musical electronics manufacturers saw the cost of their DRAM chips nearly double. However, their Japanese competitors could still buy them at a much lower prevailing market price, install them in keyboards or digital delays, and ship them duty free worldwide. John Johnson, a founder of Digitech Electronics complained about the problem in a 1985 Music Trades interview: “We pay twice as much (due to the dumping fine) for DRAM chips as our Japanese competitors. It puts us at a serious disadvantage, and we’re losing marketshare, particularly in global markets.”

Other than today, one of the few times in U.S. history when there was consensus on trade was in 1930. The stock market had crashed, unemployment was rapidly rising, and Senator Reed Smoot of Utah and Representative Willis Hawley of Oregon offered up legislation sharply increasing duties on imports of 20,000 items to “protect the American worker.” The Smoot-Hawley bill sailed through the House 264-147 and was approved in the Senate 44-42. Other nations responded with higher duties of their own, global trade slowed to a crawl, and from the vantage point of hindsight, there is broad consensus that Smoot-Hawley seriously exacerbated the Great Depression. Let’s hope the current consensus on trade has a better outcome.

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