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Facing a Quota-Free China

When quotas on imports to the U.S. from China are lifted at the end of 2008, sourcing executives are not expecting a run back to the world's biggest...

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WWD Sourcing Horizons issue 05/13/2008

WASHINGTON — When quotas on imports to the U.S. from China are lifted at the end of 2008, sourcing executives are not expecting a run back to the world’s biggest supplier of apparel.

That’s because they learned their lesson in 2005, when they were caught in a dangerous limbo after global quotas were lifted. Brands rushed to take advantage of China’s low prices and production prowess, flooding the U.S. market with “Made in China” goods. The domestic industry protested and the Bush administration then imposed safeguard quotas allowed under China’s 2001 entry agreement into the World Trade Organization. The move surprised importers, who were caught with the proverbial “too many eggs in one basket.”

To ease the uncertainty of the safeguard actions, the U.S. and China agreed to limit imports on a range of goods through the end of 2008. Now, there is uncertainty about what will happen when the quotas lift. The Bush administration has insisted it won’t impose any more quotas, but come Jan. 20 a new president will be in the White House. There are also other trade remedy options available to Congress or the next president, and the domestic industry. These include imposing countervailing duties if China is found to be unfairly subsidizing its industry and punitive charges for dumping if the U.S. finds that Chinese firms are selling goods in the U.S. either below the market price or below the cost of manufacturing.

“There is nervousness, both on the part of the retailers and the domestic textile industry, because businesses can’t plan unless they have a level of certainty,” said Scott Quesenberry, special textile negotiator in the office of the U.S Trade Representative. “This is the end of an era that brought a lot of difficulties, but also a degree of certainty. People are understandably nervous about what they face post-2008.”

The answer to a new round of uncertainty over China and other potentially volatile suppliers such as Vietnam is a diversified sourcing strategy, executives said. China is expected to remain a vital apparel supplier, but is also facing rising labor costs and infrastructure challenges ranging from pollution control to transportation needs. Most executives said they will continue to rely on a supply chain with links in many different countries because it gives them greater stability.

Kellwood’s sourcing strategy is China-based, but is not dependent on manufacturing in China, said Jeff Streader, president of Kellwood Global, the corporate supply chain arm.

“The key to our China strategy is we work with large suppliers and vendors that have a multicountry production base,” Streader said. “If there was an issue with China, any issue like dumping or countervailing duties, we would be able to move to another company in Asia.”

Using China piecemeal for raw materials and staying in the Pacific Rim can establish a strong sourcing base and help combat some of the inevitable uncertainty as the industry moves forward from the quotas, said Streader. Sourcing decisions based on cost and speed are ideal, he added, but building long-term relationships is also important for stability.

“I believe the days of sourcing the globe for the next cheapest country is not the most prudent sourcing strategy anymore,” Streader said.

Diversification is key for apparel companies, said Kevin Burke, president of the American Apparel & Footwear Association, and most apparel producers have already spread their sourcing beyond China to include Bangladesh, Indonesia, Vietnam, Malaysia and the Middle East, among other areas.

“[Apparel executives] realize that after 2008 there could be things in China prohibiting trade in certain categories,” Burke said.

The diversification of a firm’s sourcing base has been driven by a host of factors, not just the anticipated end of quotas on products from China. As prices increase in China and the U.S. continues to struggle with how to address China’s role in the world, sourcing executives are hedging their bets.

“Retail sourcing executives tell me that they have three choices they can source apparel from: Latin America, East Asia and South Central Asia,” said Eric Autor vice president and international trade counsel to the National Retail Federation during a recent panel discussion about Chinese production. “It’s like a balance and it tilts.”

Many manufacturing executives said they have no problem with the expiration of the quotas, but are ambivalent about some of the future options they see.

“We certainly don’t want to see the quotas replaced with some mechanism that functions the same,” said Mark Jaeger, senior vice president and general counsel at Jockey International Inc. “They served their purpose, now they need to come to an end.”

Jaeger said he is paying careful attention to how smooth the quotas’ winding down will be this year. For now, there is no impact on the company’s long-term sourcing plans.

While executives for now aren’t making any rash moves, there is a sense in the industry that not knowing what the future holds will create problems. Something should be done to address what will happen, said Gary Ross, president, GERoss Consulting LLC, and former vice president of sourcing for Liz Claiborne Inc.

“The uncertainty will raise the anxiety levels,” he said. “Uncertainty will be very disruptive.”

Kellwood Global’s Streader said, “There will be significant efforts to establish some type of restraints such as a monitoring program similar to what we have in Vietnam centered around antidumping. I do believe that an antidumping program with a countervailing duty regime will be established.”

The Bush administration, again at the urging of domestic textile interests, created a monitoring program last year to evaluate whether Vietnamese firms were dumping goods on the U.S. market. Two rounds of monitoring found no dumping and a final report is due in September.

The most likely course open to domestic companies or trade associations would be to file antidumping and countervailing duty cases against China with the International Trade Commission and the Commerce Department. Domestic manufacturers could also pressure the federal government to file a WTO challenge against China, but it is inherently risky given the relationship between the two countries. Legislative options could also be pursued.

“We would like to see the U.S. government pursue and consider discussions with the Chinese about the potential to extend quotas, and we would like to see them review any formal case we might file in an expeditious manner,” said Auggie Tantillo, executive director of the American Manufacturing Trade Action Coalition. “We are hoping that the government does not take an inactive view of the impending quota elimination.”

On the other hand, Julia Hughes, senior vice president of international trade for the U.S. Association of Importers of Textile & Apparel, said, “From the importers side, we’ve been concerned about the deadline and what might happen, whether there will be efforts to try and extend the quotas. We have received assurances from the administration that there is no ‘secret plan’ to extend.”

The USTR’s Quesenberry said, “The long and the short of the matter is that at the end of the year, the authority under which the China safeguards were invoked expires. Without that authority, nobody has shown me how they could possibly be reinvoked.”

What’s Under Quota

The 2005 U.S.-China quota accord restrained imports on 34 categories of apparel and textiles, impacting a wide swath of the industry. The categories put under quota includes bras, cotton trousers and shirts, and knit fabric. In 2007, the most recent full year for which import data is available, 21.37 billion square meter equivalents of textile and apparel were imported from China. That represented 40.2 percent of the total apparel and textiles the U.S. imported. The 34 quota categories were responsible for 12.3 percent of textiles and apparel imported from China, a total volume of 2.6 billion SME, worth $9.4 billion.

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