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Pre-Holiday Nightmare: Retailers Rush to Beat Embargoes on Key Items

Stores could be strapped for the holidays if a U.S. Customs review of bras leaves them exposed and embargoes lock out critical holiday merchandise.

WASHINGTON — It’s a race against time right out of “Around the World in 80 Days.”

Retailers and manufacturers are scurrying to beat potential U.S. Customs embargoes on critical holiday merchandise and get their apparel shipments across the Pacific Ocean from Asia and into stores. They’re being squeezed by the crucial Christmas shopping season and the impending end of quotas on global textile and apparel shipments come Jan. 1.

The first product being hit is bras, which currently are the subject of a U.S. Customs & Border Protection review for alleged transshipment and are part of the intimate apparel category, one that does 27 percent of its annual sales during the key holiday shopping season. Meanwhile, bras are close to filling their quota for the year, one of up to 60 apparel categories nearing the end of their import limits for 2004.

In a sign of how desperate things are, many large retailers and producers are shipping bras by air to the U.S., an expensive route, to beat the anticipated embargo and get them through Customs before the ships carrying competitors’ bras arrive.

Further complicating the sourcing picture is the fact that retailers can’t borrow against next year’s quotas in order to get additional shipments into the country in 2004. Since there will be no quotas in 2005, once a category is filled this year, all further imports will be barred. In addition, West Coast ports are already backlogged by importers looking to get goods into the country under quota and in time for holiday sales and promotions.

U.S. Customs & Border Protection has issued a public memo to importers that it is scrutinizing shipments of bras, dressing gowns, and robes and knit fabric from China due to “numerous entries not claiming the country of origin China,” despite documentation proving otherwise.

“VF Corp., Maidenform, Sara Lee and Warnaco have a lot on the line,” said an executive at an intimate apparel company, who requested anonymity. “There could be big exposure out there and companies could lose millions of dollars.”

The executive also pointed to private label manufacturers that might do 20 percent of the volume with a Target or J.C. Penney and lose it in the last two months of the year.

“This bra [issue] is worrisome,” said Wendy Wieland Martin, vice president of international trade for Kellwood. “We are still bringing in goods for the holidays. Every company watches fill rates and if we had known [the bra category] was going to close earlier, we might have been able to fly the goods in. Now no one knows what will happen.”

Rich Murray, president of bra and shapewear maker Wacoal America, the U.S. subsidiary of Wacoal Japan, said he is “very concerned” because the company sources its Donna Karan Intimates business in China.

“We definitely have programs scheduled for delivery in late November and December that we are counting on receiving,” Murray said. “I don’t know what the retailers’ reaction will be. It could be they won’t want the product at all or only take it at a discount if we can’t get it in until January.”

Murray said the other complication is that big retailers might opt to fly in their products to beat the anticipated embargo, which would close the quotas more quickly and hurt those companies that have shipped the bras by sea to the U.S.

“This is not going to have a major impact on our business because we are not a big player in China, but no one wants any impact when you get into the last two months of the year,” Murray said.

Erik Autor, vice president and international trade counsel at the National Retail Federation, said he could not estimate how big the impact would be on holiday retail sales because no one knows the size of the illegal shipments.

“The bulk of holiday shipments is already in, but if the quota unexpectedly closes and retailers find their imports being embargoed, that obviously is a big problem, especially since this seems to be unexpected,” said Autor. “It all depends upon how much mislabeling with the country of origin has been going on and how much will be charged back to the quota, and what that means in terms of when the quota closes.”

Many industry executives are certain there will be some impact on goods reaching the selling floor in time for Christmas, combined with other categories that have or soon will reach their import limits. And the category is a key one for holiday: Women’s intimate apparel registered $2.3 billion in fourth-quarter sales last year, representing 27 percent of annual volume for the category, according to the NPD Group.

If Customs finds a large quantity of bras bearing false country-of-origin documents, it will charge that amount against China’s quotas, which are close to filling already, and that would instantaneously close the bra quota for the year, potentially stranding millions of dollars worth of bras on the high seas right before the holiday season.

Brian Fennessy, acting branch chief of textile policy and trade initiatives at Customs, said the agency is conducting a review of three categories from China that were placed under quota last year.

“During a routine review, we found some merchandise that was incorrectly entered,” Fennessy said. “We had shipments of bras — a safeguard category — out of China that were entered as country of origin Hong Kong. When the review documents showed the goods had a country of origin China, we decided it was something we should focus on.”

Fennessy said Customs is reviewing the specified imports from China on a case-by-case basis and “taking appropriate action,” which includes charging China’s quota for the amount that was improperly declared. He noted there are three criteria for penalties — negligence, gross negligence and fraud — depending on the case.

Fennessy said he believes officials have already charged China’s bra import category for the first shipment that was reviewed, but the review will continue. The bra category from China is currently 93.9 percent full and has not been put on hold or closed, he said.

If Customs places an embargo — the government process for denying goods entry into the country when a quota category fills — retailers and importers will have a tough choice to make. They can either hold the excess merchandise in bonded warehouses until the quota expires — in the case of bras, that’s Dec. 23, a mere two days before the holiday — which is often a costly option, or ship the goods back to the country of origin and sell them at a loss.

The other big wrinkle beyond the holiday season is that a transshipment determination could bolster the domestic textile and apparel coalition’s case for extending quotas on these products for another year. The Bush administration imposed quotas on imports of bras, dressing gowns and robes and knit fabric from China last December at the behest of the U.S. coalition under a unique safeguard mechanism to which China agreed when it joined the World Trade Organization.

Those quotas are set to expire in a little over one month and the coalition has vowed to file renewals with the government seeking to impose import restraints for another year.

Meanwhile, several apparel categories from a whole host of countries have either already been embargoed or are close to embargoing and could create similar problems for U.S. companies before the holidays.

Four apparel categories have embargoed in the past month and another five have been placed on hold by Customs until officials can determine if quota limits have been reached. International Development Systems, an analysis and research firm, is projecting another 59 categories will embargo before the end of the year, which would be a dramatic increase over most years, in which 10 categories embargo on average. This year’s embargoes are affected, in part, by the inability of importing nations to borrow quota in rapidly filling categories from the next year — also known as carry forward — as they have done in year’s past.

Women’s wool coats from Bulgaria, women’s wool coats from Malaysia, men’s woven cotton and man-made fiber shirts from India, and dressing gowns and robes from China have all embargoed.

In addition, Customs has placed four other apparel categories “on hold” and is counting the remaining quota. Cotton knit shirts from Vietnam, knit fabric from China, mens’ and boy’s wool suit-type coats from the Philippines and wool sweaters from the Philippines are in danger of closing any day.

To make matters worse for retailers and importers, the Committee for the Implementation of Trade Agreements, the interagency government agency overseeing quota management in the U.S., issued a statement earlier this year that said it reserved the right to do staged entries of embargoed goods or permanently deny entry to overshipped products in 2004 if massive surges from countries occurred.

If a product category embargoes, companies that put the goods in a bonded warehouse still don’t know whether they will get the products in the beginning of January.

“This is not just a China issue,” said Martin of Kellwood. “It looks like there will be embargoes all over and we have to look at all of our options. But the problem with our options is we don’t know what the rules are going to be. We are in limbo this year.”

Quota Watch: Embargoes

Retailers and importers are keeping a close eye on many apparel categories with high fill rates that are expected to embargo before the holidays. Customs has placed embargoes on four categories from four countries during the past month, which means that no more goods of those varieties may be imported from those countries until next year. An additional five categories of merchandise have been placed “on hold,” which means shipments are being temporarily halted. Of the three categories of Chinese imports subject to safeguard quotas, robes and dressing gowns are already under embargo, knit fabric has been placed on hold and the bra category is filling rapidly.

COUNTRYPRODUCTQUOTA LIMITUSAGE TO DATESTATUS
ChinaCotton and man-made fiber robes and dressing gowns4.1 million dozenFullEmbargoed
IndiaMen’s and boys’ woven cotton and man-made fiber shirts3.4 million dozenFullEmbargoed
BulgariaWool coats33,340 dozenFullEmbargoed
MalaysiaWool coats20,093 dozenFullEmbargoed
PhilippinesMen’s and boys’ suit-type coats3,746 dozen99.7 percentOn Hold
VietnamCotton knit shirts15.6 million dozen99.2 percentOn Hold
PakistanMan-made fiber pillowcases1.3 million dozen99.0 percentOn Hold
ChinaKnit fabric9.6 million kilograms98.8 percentOn Hold
PhilippinesWool sweaters35,917 dozen98.5 percentOn Hold
ChinaCotton and man-made fiber bras16.8 million dozen94.0 percentOpen

SOURCE: INTERNATIONAL DEVELOPMENT SYSTEMS