Getting the Lead Out: American Style, Foreign Substance

(The Washington Post) -
lead pencils

Dixon Ticonderoga sold millions of the iconic No. 2 yellow pencils American children took back to school last month. But the 223-year-old firm has survived by relying on more than just its reputation as the producer of sturdy and steady writing instruments. A key part of its approach has been to use U.S. trade law to reap government benefits and protection as it also moved almost all pencil production to Mexico and China.

The company has collected nearly $5 million in federal funding aimed at victims of foreign trade abuse since 2005 and has requested millions more, according to Customs and Border Protection records. And the fact that it has a Georgia distribution center has allowed Dixon to successfully petition the U.S. government to impose a 114.9 percent duty, or tax, on Chinese competitors — more than doubling the costs for some other pencil manufacturers.

But even as it receives these protections, its status as a U.S. firm is unclear. It has shed hundreds of jobs, and a key U.S. agency removed Dixon’s designation as a “domestic” manufacturer because it made so few pencils at its Georgia plant.

At retailers such as Staples, Target and Amazon.com, The Washington Post was unable to find a single Dixon pencil made in the United States. The Post purchased two sets of pencils from Staples.com and Amazon.com that were marketed on their web pages as having been made in the United States, but the pencils that arrived in the mail were made in Mexico. (Amazon chief executive Jeff Bezos owns the Post.)

Dixon, which was founded in New Jersey in 1795, was acquired by an Italian company in 2005, and it’s unclear whether its U.S. operation even has a chief executive.

“It’s kind of a secretive business,” said Mike Smith, president of Tennessee-based Musgrave Pencil, a competitor. “There’s not a whole lot of us left.”

The economic forces that reshaped Dixon are now part of a fierce debate in Washington and around the world. President Donald Trump is trying to rewrite free trade deals, at least one of which was part of Dixon’s evolution, arguing that existing policies allow companies to use cheap foreign labor and eliminate American jobs.

Some companies took it much further than that, though, not only moving jobs overseas but also using U.S. government policies as a way to collect more revenue and disadvantage competitors.

The firm’s corporate headquarters is in Florida, but the bulk of its remaining U.S. operation is a distribution center in Macon, Georgia, where the company has said — in filings before a U.S. trade court — it still manufacturers an undisclosed number of pencils. Under federal law and regulations, Dixon has been able to use this distribution center as a basis to seek various types of government assistance.

Little is known about this Macon distribution center, though. The Macon Economic Development Commission recently reported that the facility had just 17 employees. The U.S. International Trade Commission, an independent federal agency that investigates trade disputes, has ruled that Dixon makes so few pencils there that it no longer considers the company a “domestic” manufacturer.

The company says that, worldwide, it makes nearly 500 million pencils each year, but it would not release any details about its U.S. production. It denied the Post’s request to tour the facility. Photographs of the Macon distribution center, posted by employees on social media, offer only a limited view of its operations, showing a number of cardboard boxes marked “Made in China.”

“Typically we don’t bring people into our manufacturing facilities, given the sensitivity of it,” said Carlos Reyes, Dixon’s vice president of marketing. He said the company would not provide the Post with any more information.

U.S. consumers spend about $557 million on pencils annually, according to NPD Group, a firm that tracks market trends. Pencil prominence in American life has dimmed, but there is a surge of sales late each summer as parents stuff their children’s backpacks for the first day of school.

The pencil market used to be big business. Dixon was among the largest, and it considered its pencils the best — citing the American cedar and a graphite tip that could withstand a child’s rough scribble.

Dixon Ticonderoga remains the required pencil company for some U.S. schools, including some in the District of Columbia, according to school supply lists. Major U.S. retailers stock boxes of sharpened and unsharpened Dixon pencils, with some selling 30-packs for about $6.

But the vast majority — if not all — of those pencils are made abroad. That’s because, after decades of growth, the domestic pencil industry was decimated starting in the mid-1990s as jobs went to Mexico and then China, and cheap imports of foreign-made pencils poured into the United States.

It was a sudden change in a long trajectory.

Since its founding, Dixon Ticonderoga has found ways to mass produce pencils and perfect the composition of graphite, not lead, that makes up the charcoal tip. In its heyday, Dixon had facilities in New Jersey, Florida and across the Midwest.

In 1954, the company set up a manufacturing facility in Mexico, but it wasn’t until the mid-1990s that this part of the business started to prove critical.

China, then a rising economic power, had begun exporting huge numbers of ultra-cheap pencils, a direct challenge to U.S. manufacturers. So Dixon and others urged the Commerce Department to craft a regulation, based on a 1930 law, that would contain China’s pencil business. Under this 1994 rule, U.S. pencil manufacturers could petition the department to put a steep levy on Chinese companies found “dumping” pencils.

At the same time it was fending off China, the United States was looking to boost trade with Mexico via the North American Free Trade Agreement, the 1994 free-trade pact between the United States, Canada and Mexico. The U.S. pencil industry viewed this as a critical way to survive.

“It’s the only way we can compete with Asia,” Gino Pala, Dixon’s then-chairman, told the Orlando Sentinel in 1999. “I’m bullish on Mexico and the business we have there.”

But Mexico turned out not only to be a competitive tool — it was the stepping stone to a mass movement of labor. And the efforts to contain China failed. Around 2000, Dixon established a Chinese manufacturing affiliate.

In 2002, Dixon closed its plant in Sandusky, Ohio, a coal-powered factory considered to be the oldest in the state, cutting 115 jobs. The company was moving the operations to Mexico and asked some of its Ohio workers if they would train their replacements. The plant’s manager at the time, Jim Alexander, told the Toledo Blade that the facility was antiquated and costly to run.

Roger Bibler, who was head of the local employee union, said the staff was stunned. He said his impression was that the plant was doing well, always full of seasoned workers.

“Our oldest man walked out of there after 51 or 52 years and cried like a baby,” Bibler said in an interview. He said he never purchased another Dixon Ticonderoga pencil after that day.

The company brought some of the Mexican workers to the Sandusky plant and asked if the Ohio workers would train their replacements, but most refused.

“There’s no other purpose to move other than you want cheaper labor and you want to make more money for your own pocket,” Bibler said. “I think they went from quality to quantity for less amount of money.”

The shift to Mexico was the prelude to subsequent, bigger steps toward globalization. In 2005, after 210 years as an independent U.S. company, Dixon was acquired by Fabbrica Italiana Lapis ed Affini, an Italian firm that makes pencils, art supplies and a range of other products.

The same year, Richard Asta, Dixon’s then-chief executive, announced that he was closing the firm’s main U.S. pencil factory in Versailles, Missouri.

The International Trade Commission, which is in charge of reviewing the impact of the Commerce Department’s regulation every five years, said in a report last year that Dixon’s pencil production was decreasing and was only a fraction of what it was a decade ago. (The agency wouldn’t give precise figures.)

“Dixon Ticonderoga’s primary interest is not in domestic production,” the ITC said in its report — a characterization that Dixon protested, to no avail.

More broadly, the commission said the industry has given up on specialty pencils (such as golf pencils) and promotional products because Chinese imports have decimated traditional markets.

“The American pencil companies began to die off, one after another because of these imports,” said Henry Petroski, a professor at Duke University and the author of “The Pencil: A History of Design and Circumstance.”

He said Dixon “was the only pencil brand made in America that pretty much survived.”

But even as it increasingly moved its pencil business overseas to survive, Dixon sought to make use of the protections that Congress extended to preserve domestic industries.

In 2000, lawmakers passed the Continued Dumping and Subsidy Offset Act, which allowed American companies to collect some of the duties paid by importers of their competitors’ products. Dixon repeatedly made claims, saying it was a domestic manufacturer, and the government sent the company payments over 10 years totaling almost $5 million, according to U.S. Customs and Border Protection records.

In 2015, Timothy Gomez, Dixon’s then-chief executive, sent a letter to U.S. Customs and Border Protection saying the company was still seeking government payment to cover $149 million in pencil-making expenses. In the letter, released as part of a court case between a Chinese importer, Dixon and the Commerce Department, he said Dixon was a domestic manufacturer and still made pencils in the United States.

Gomez left the company last year and declined to respond to questions from the Post, citing a confidentiality agreement. The company would not say whether he has been replaced.

The government’s last large check to Dixon came in 2015, for $189,250.62.

At the same time, the company has been petitioning the Commerce Department to impose import fees on Shandong Rongxin Import & Export, a Chinese firm that brought pencils to the United States for large U.S. retailers. In response, Shandong Rongxin’s lawyers claimed that Dixon didn’t make pencils in the United States anymore — which would mean it doesn’t have standing.

The case was litigated in a special tribunal known as the U.S. Court of International Trade.

Rongxin’s counsel was John “Jay” Kenkel, a longtime trade lawyer who had helped Dixon come up with a strategy to avoid extra taxes on its own Chinese imports just a few years before.

His office purchased boxes of Dixon pencils, according to court filings, which were stamped with the words “Made in Mexico” and “Made in China.” He also cited a 2011 news release from the Labor Department’s Occupational Safety and Health Administration, which cited Dixon’s Macon plant for 23 violations and described the facility as printing “custom designs onto pens, pencils and other writing instruments.”

Kenkel alleged in these court filings that Dixon had “provided not even a scintilla of evidence on the record to support” the argument that it manufactured pencils in the United States in recent years.

In court and regulatory filings, though, Dixon told the Commerce Department that it does continue to manufacture pencils in Macon. U.S. law doesn’t require the company to produce a specific number of pencils to receive government benefits.

A Commerce Department review, found, among other things, evidence that the company had made close to 1,500 boxes of golf pencils, evidence it deemed adequate to supporting the company’s position.

A federal judge ruled against Shandong Rongxin last month, in part because it is partly owned by the Chinese government, and the company is now weighing whether to appeal.

Dixon’s legal battles in some ways mark the last frontier of the American pencil industry. Some observers remain mystified that there is still this much fighting over a product as simple as a pencil.

“If [Chinese companies] want to make pencils and paper clips, what do we care?” said Francis Sailer, a former Commerce Department official who has represented both Dixon and Chinese pencil importers in the past. “We have technological advantages in so many other areas.”

Dixon’s luck with U.S. government trade policy could soon end. In an effort to try to fight back against China’s ability to lure companies such as Dixon to Asia, Trump this year has imposed tariffs on half of all Chinese imports to the United States. He has excluded pencils so far, but they are likely among the groups that will be targeted.

This could, inevitably, hit much of Dixon’s manufacturing base, forcing the company to decide whether to shift its operations once again or see its U.S. pencil prices rise next summer, just when back-to-school shopping begins again.