Case Study: Crystal Lake Manufacturing – And the NAFTA Dilemma
Not everyone sees globalisation as a positive phenomenon. At the time the Uruguay round of multilateral trade talks was being concluded. The US also concluded the agreement to create a North American Free Trade Area (NAFTA). Essentially designed to stabilise Mexico economically and politically, NAFTA has been a mixed bag of successes and failures. The agreement led support to the argument in the US that both the Uruguay round outcomes and NAFTA would result in substantial job losses in the US as American firms could not compete against cheaper goods flooding into the market from South of the border or from low cost manufacturing countries like China.
In this case we are going to look at the experiences of one such firm Crystal Lake Manufacturing as it tries to meet or beat the NAFTA challenge.
Crystal Lake:
Since the first broom came off of the production line in 1935, Crystal Lake Manufacturing, Inc. has become the nation’s leading producers of corn brooms, wet and dry mops, and broom and mop handles.
Crystal Lake’s history is rich in pride, quality and family tradition. Founded by the late Edward Holmes Pearson and his wife, Ercille Willett Pearson during the Great Depression, the company was initially intended to provide work for unemployed sharecroppers. The Pearson influence and tradition at Crystal Lake has spanned three generations
By the end of 1999, however, Crystal lake manufacturing of Autaugaville, Alabama was trying to decide if it could survive in the NAFTA environment once tariffs were dropped n Mexico broom shipments into the US. In 1996 and in line with the US’ NAFTA commitments; the then US president Bill Clinton had noted that he would be prepared to provide the US broom industry with limited tariff relief from imported brooms for a period of just three years that would permit domestic industry to implement an adjustment plan enabling facilitation of a positive adjustment to import competition.
The Product :
The broom industry in the US is composed of brooms that use natural fibres and those that use synthetic fibres. It is the natural fibres part of the market and its relationship to US trade agreements, especially the Caribbean Basin Initiative and NAFTA the issue for Crystal lake. Broom-corn brooms are made of a stiff fibre generated from a corn (know as broom corn). This commodity typically was indigenous to the mid west but has not been grown there since the 1970s. Cultivation of this crop has gradually moved to Mexico to take advantage of cheaper labour rates. In 2004 virtually all the broom corn US producers use comes from Mexico.
The Manufacturing Process:
The broom corn production process is very labour intensive using either the wire bound process (binding the broom together) by individual workers using a simple winding machine operated by a foot pedal. It is a difficult process and takes months even years for a worker to master the process. An experienced worker can produce 18-20 brooms in an eight hour shift. Experience is the key and workers are paid on a piece rate basis. Approximately 25 per cent of the cost of the broom is bound up in labour costs. Skilled workers receive, on average, $8 per hour in the US compared to a significantly lower wage in Mexico; the average cost of a corn broom in Mexico was $1.92 compared to $3.00 – $4.00 (1995 prices) in the US.
Crystal lake and the US Corn Broom Task Force:
Crystal lake is a small company making broom corn brooms while also selling brooms made from synthetic fibres, mops and cleaning brushes on a nation wide basis only. It employs 125 people. It is a member of the US Corn broom task force, a lobby group which together with nine other firms, lobbies on behalf of the US industry as a whole and helps consolidation in the industry to meet competitive pressures from abroad. Must of the companies in the task force are small and family owned. The industry as a whole in the US employees roughly 600 people. Due to the fact that many of these firms are located in regionally depressed rural areas with high unemployment figures (Autaugaville’s population is just 1099 happy people) their survival is seen as important. With the creation of NAFTA Crystal Lake would see a phased reduction of the 32 per cent tariff wall that against imported corn brooms from Mexico. It is estimated that half Crystal Lake’s workers may lose their jobs if the company wishes to remain competitive.
The Competition:
Foreign suppliers of corn brooms to the US market come principally from five countries, Mexico, Honduras, Columbia, Panama and Hungary.
The Industry Response to NAFTA:
In response to the rapid increase in corn broom imports to the US market, the Corn broom Task Force filed petitions in two areas section 302 of NAFTA and section 202 of the 1974 Omnibus Trade Act, with the US International Trade Commission to win protection from foreign competition.
In July of 1996 the USITC ruled in favour of the Corn Broom Task force stating that the US industry was being injured by an increase in corn broom imports from Mexico due to the elimination of tariffs in line with NAFTA obligations. They recommended that the Clinton administration impose a 30 percent tariff duty against imported Mexican corn brooms and also suspend tariff free access for similar brooms made in the Caribbean Basin and Andean countries. They did, however, apply a caveat and that was that such protection was for three years only and the tariff protection was to be reduced by 10 per cent per annum until after three years all such protection would cease.
