For Glen Dobi, founder and chief executive of Dobi & Associates, free trade isn't necessarily all it's cracked up to be.
Dobi uses lumber from Canada that is milled in the U.S , and then shipped back to Canada for final processing of the company’s specialty cedar chips, which are used for barbecues and grills, and sold primarily in the U.S. and Canada. The company, which was founded in 2003, also tested manufacturing in Mexico, one of the North American Free Trade Agreement (NAFTA) partners, before settling on its current model, which Dobi says is more efficient.
With the strong dollar, the cost of manufacturing is lower in Canada, but the cost of Canadian lumber, which is denominated in U.S. Dollars, increases his expenses, so on balance, there’s not necessarily a cost advantage. But thanks to NAFTA, which eliminated trade barriers and boosted investment opportunities between the U.S., Canda, and Mexico, Dobi has been able to experiment in all three countries, to get its production formula just right. Today, the company sells its chips in Canada and the U.S., with no tariffs.
“It is easy to flow the goods back and forth between the two countries,” Dobi says. Dobi, an Inc. 5000 company with sales of $12.5 million and 10 employees, has experienced revenue growth of 82 percent in the last year.
Dobi’s lessons are potentially instructive for fellow business owners, as the U.S. struggles with passage of its most recent trade agreements, which include the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). On Thursday, the Senate voted 62-38 to end debate on giving trade promotion authority to the president for six years. That should allow the TPP and other trade deals negotiated by the president to advance for a straight up or down vote in the House. The House is expected to hold its own vote on the TPP, which involves 12 countries and is estimated to encompass 40 percent of the world economy, by early June.
Opponents of the TPP, which includes various Tea Party members, presidential hopeful and Vermont senator Bernie Sanders and Massachusetts senator Elizabeth Warren, criticize the secretive way trade deals are negotiated, saying they never live up to their promises. And they specifically call out the TPP for not doing enough to protect environmental and labor standards, among other things. Others say the deal will give large companies unfair advantages over partner countries in trade disputes, as well as unfair advantages for really big businesses in protecting their patents overseas. There are also concerns that the new trade pacts will cost the U.S. jobs.
These are not idle worries. By some estimates, in the years following NAFTA’s 1994 ratification, the U.S. lost close to 1 million jobs as our trade deficit with Mexico has ballooned to $58 billion, about ten times what it was 30 years ago. Many of those job losses hit specific industries hard, such as fabrics and textiles manufacturing.
Certainly entrepreneurs such as Travis Oates, the third generation owner of fabric mill MWW Solutions can speak first-hand to the hard times that NAFTA brought to its workers. Prior to NAFTA, the mill, based in Hendersonville, North Carolina, employed 1000 employees who produced throws and blankets on its dozens of jacquard looms. Following the trade deal, the mill was forced to lay off more than two thirds of its workers.
“NAFTA negatively impacted the mill,” Oates, whose grandfather started the company in 1932 as a wooden souvenir manufacturer, says. “Any time our government makes it easier for our businesses to go overseas and produce goods, it instantly affects us.”
For all that can be bad about trade deals, they also provide some support to small business owners in new markets. And in other ways, they’ve forced U.S. entrepreneurs to reformulate how they do business to stay competitive within the U.S.
The Power of Reinvention
For Oates, who co-owns the Mill with his sister Molly Sherrill, NAFTA's downsides were tough but not insurmountable. Over the past decade, noting the trends for on-demand printing and custom-made products online, the company invested millions of dollars upgrading to 21st century technology, including order-management and design software and state of the art digital printers, that allow the mill to process and produce tens of thousands of personalized orders a day, including digitally printed canvas bags, totes, throws and wall art.
And since 2008, the Mill’s workforce has grown again, to 500 full-time workers. “We reinvented ourselves 100 percent,” Oates says, adding the TPP is nevertheless an ongoing cause for concern, as it could again flood the U.S. with potentially cheaper imports from competitors in Asia.
More recently launched companies, such as Inc. 5000 company and paper goods manufacturer Lollicup, based in Chino, California, have an eye to using trade deals to their advantage. Lollicup was founded in 2000, and it used to manufacture its paper cups and other disposable food wares in China and Taiwan.
In June of 2014, however, Yu moved its manufacturing from Asia, back to the U.S., hiring 100 workers to man machines in a 400,000 square foot facility in Chino, thanks in part to technological advances. His machinery allows him to produce products more rapidly and efficiently in the U.S., Yu says.
“In the past, it would have been hard to compete with the lower labor costs overseas, but now with the efficiencies we have in the west, and with the tariff incentives, we should be competitive,” Yu says.
While 90 percent of the company’s roughly $122 million in sales comes from the U.S., the remainder comes primarily from Asia, Wu says. And thanks to the free trade agreement that the U.S. inked with Korea in 2012, Yu says his products now price competitively with rival products from China and Taiwan.
With those factors in mind, Yu says he welcomes the TPP, which will lower trade barriers with numerous Asian countries, including Malaysia and Vietnam.
“We are looking to expand our exports back to Asia,” Yu says, adding that at a recent trade show in Korea, the company oversold its capacity.
Still, not everyone is so happy with the idea of more trade pacts. Currently, the U.S. has agreements with 20 countries on the books.
Mark Dwight, founder and owner of Rickshaw Bagworks, also an Inc. 5000 company based in San Francisco, California, says he thinks the U.S. should focus more on supporting its manufacturing base, rather than looking continually to expand markets overseas.
“In the interest of being free-trade oriented, we have crippled our own manufacturing capabilities and traded them away,” Dwight says, adding that although he doesn’t consider himself a protectionist, he also thinks free trade agreements don’t adequately address worker, environmental concerns and other ethical considerations.
Rickshaw, which has approximately $3 million in sales, produces all of its products in San Francisco, with materials that are primarily sourced in the U.S., including from Oates’ mill in North Carolina.
Dwight’s 30 workers produce bags, wallets and totes from a 6,000 square foot brick and timber facility in San Francisco’s Dogpatch neighborhood. His workers are paid $22 an hour on average--far more than counterparts producing cheaper products overseas, including in potential new trading partner countries.
Just the same, by manufacturing in the U.S., Dwight has had to make some sacrifices in terms of design complexity to make his product affordable. It’s also meant he sells to a very specific market, interested in owning something produced in the U.S.
Of course, Rickshaw’s products now benefit from a special status that allows it to compete with cheaper overseas bags and backpack vendors, which must pay a 17.5 percent tariff. Trade deals like the TPP could eliminate that advantage.
And what’s at stake could be the ongoing existence of one of the economy’s most vital underpinnings, which is our ability to manufacture and create products for ourselves.
“The argument that the American consumer benefits from low-cost offshoring is a true statement, but at what cost?” Dwight says.