On Sat, 5 Mar 2011 03:41:09 -0800 (PST), TwoGuns
wrote:

I was at a shoe store recently and a quick check of a few shoe boxes
indicated that most shoes are not made in the USA. I can understand
why some products are not made in the United States but shoes?
snip
Long response but so is the story

When examined in depth this is a very long running but
highly illustrative saga dating back to at least the late
1950s and early 1960s. To avoid possible libel action, I
will call the exemplar company "The Sepia Shoe Company"
founded in the late 1870s and originally domiciled in St
Louis Missouri, because of the large numbers of packing
houses and the resulting supply of cheap leather.

The company survived two world wars and the depression, but
in the late 50's/early 60's began moving production
operations out of St Louis to rural areas, particularly
those south of St Louis. Much of this was driven by the
economic development activities of those rural areas, which
offered land, labor, and financing at very attractive, i.e.
taxpayer subsidized, rates. The financing allowed the
construction of state of the art buildings and purchase of
the latest shoe manufacturing technology.

After about 10 years [mid 70s], the new equipment was
becoming obsolescent and worn out, the local hourly
employees were getting restless wanting higher wages, the
local ED tax abatements were expiring, and fat early years
of equipment tax depreciation were ending. Most fortunately
for the Sepia Shoe Company, the mantra in Washington was
"trade, not aid" at this time, and Brazil was heavily in
debt to the Wall Street knee knockers. Brazil also had
large leather surpluses, and additional hides and finished
leather was available at very cheap prices from Argentina.
The production operations were quickly shifted to Brazil,
largely financed by local [Brazilian] economic development
funds, state of the art buildings constructed, and the
newest, most productive shoe machinery purchased.
Unemployment was high, and any wage was better than no wage.
As Brazil was under a military dictatorship at this time, no
labor problems were anticipated as unions were forbidden.
http://en.wikipedia.org/wiki/Brazili...ary_government

It was at this stage that the domestic shoe industry became
important, at least locally, and may have decided at least
one Senate election when one candidate [IIRC an incumbent]
was photographed wearing Gucci loafers [Italian made at that
time] with a distinctive metal decoration on the instep,
while making speeches about protecting the domestic shoe
industry to the local "great unwashed" of Missouri.

One new wrinkle with the establishment of international
operations was the extensive and active use of transfer
pricing. Sepia Brazil did not sell directly to Sepia USA,
but rather to an intermediary we will call Sepia Aruba. [It
is still not clear who actually controlled Sepia Aruba.]
The grift worked like this. The shoes and other leather
goods, e.g. belts, were produced cheaply by Sepia Brazil,
and sold cheaply to the international marketing and
distribution arm Sepia Aruba, generating little profit in
Brazil by Sepia Brazil, not enough in many cases to cover
the financing costs, and certainly not enough to justify any
raises for the local employees. Sepia Aruba then sold the
shoes and other leather goods to Sepia USA at a very
considerable markup, so little profit was generated in the
US by Sepia USA sales. By a strange coincidence there was
and is no corporate income tax in Aruba, so huge pools of
untaxed and unregulated capital of unknown ownership/control
quickly accumulated.

In the mid 80's control of Brazil was returned to a civilian
government and the financial dealings/arrangements of the
military dictatorship [1964-1985] were reexamined, and
serious questions began to be raised about the failure of
several international operations in addition to Sepia Brazil
to charge arms-length or customary/usual prices for their
exports sold to other divisions, and their failure to pay
their local taxes, reasonable wages, reinvest in domestic
facalities or even pay off the ED bonds.

Time elapsed and more populist/nationalist governments were
elected in Brazil and several tax evasion and financial
manipulation investigations started, and wages increased
through minimum wage legislation. It should be noted that
Sepia Brazil had very few assets beyond the now dated
buildings and obsolescent/worn-out shoe manufacturing
equipment, and much of this was collateral for the
local/Brazilian ED bonds/financing through the New York
banks but guaranteed by the Brazilian people/government.

By the mid to late 90's, the Sepia Shoe Company was
abandoning Brazil, leaving the creditors of Sepia Brazil
"holding the bag," as they transferred their manufacturing
operations to China and India, again using local ED funds to
construct state of the art buildings and purchase the very
latest shoe manufacturing equipment. When "earnest money"
was required, Sepia USA could easily borrow from
international sources, which may well have been the funds
amassed by Sepia Aruba, but because of the local bank
secrecy laws there is no way to tell. If this is indeed the
case, Sepia USA is paying high interest rates to itself for
using its own [Sepia Aruba] money while deducting the
interest costs as a tax-deductible business expense against
their US and other taxable income.

The transfer pricing dodge where a separate "trading and
marketing" company [Sepia Hong Cong? Sepia Macau?] buys low
(locally, from Sepia China, Sepia India) and sells high (to
Sepia USA for US distribution), appears to still be
operating but though Asian tax haven countries. I don't
know about India, but the Chinese apparently learn from the
mistakes of other, and require local participation/control
and technology transfer. Vietnam is another area where shoe
manufacturing is being transferred.

As you can see this is not a "sudden" or "new" problem but
one that has festered and metastasized over at least 2
generations of politicians and 3 company iterations,
persistently aided and abetted by US governmental
policy/neglect.








-- Unka George (George McDuffee)
...............................
The past is a foreign country;
they do things differently there.
L. P. Hartley (1895-1972), British author.
The Go-Between, Prologue (1953).