By  on February 15, 2005

WASHINGTON — The U.S. government’s China safeguard review has been on ice for six weeks, and the fallout from a federal court’s temporary injunction is still largely unknown.

Domestic textile producers are concerned the delay in the process has already allowed unrestrained imports from China to flood the market, while U.S. importers claim they have a little breathing room but are concerned about safeguard quotas in the second half of the year.

The industry’s anxiety stems from a legal battle over whether the government has the authority to impose limits on Chinese textile and apparel imports, which has prompted widespread speculation on how soon Chinese safeguards will be imposed.

Companies are planning their business strategies based on the assumption safeguards will be applied at some point this year. The only question is when they will be imposed, according to both opponents and supporters of the temporary quotas.

The big question fueling panic in industries from Guatemala to Lesotho this year is whether China will quickly move to dominate global textile and apparel trade, now that quotas have been lifted among all World Trade Organization member countries.

China agreed to the safeguard provision, or temporary quotas, when it joined the WTO. Under the agreement, an importing nation can impose one-year quotas on Chinese apparel and textile categories through 2008 when it determines they have caused or threaten to cause market disruption.

In the U.S., a coalition of textile, fiber and some apparel producers, as well as the union UNITE HERE, rushed to use the safeguard mechanism in October in advance of the elimination of the 30-year-old quota system and filed 12 petitions targeting some $1.9 billion in Chinese imports for further quota restraints.

The federal interagency Committee for the Implementation of Textile Agreements, which oversees the safeguard petitions, was set to make a final determination on the first of the 12 threat-based petitions on Feb. 1. If the government had approved the first China safeguard petition covering cotton trousers, quotas could have been imposed in February.

However, the U.S. Association of Importers of Textiles & Apparel thwarted the government’s safeguard review process when it filed the lawsuit and won a temporary injunction from the U.S. Court of International Trade at the end of December.The U.S. Justice Department filed a motion for a stay of the preliminary injunction in the U.S. Court of Appeals for the Federal Circuit last week after the CIT denied its motion for a stay. The government has not yet filed an appeal of the six-week-old temporary injunction, although it recently notified the court of its intent to do so.

Among the questions causing headaches on both sides of the divide are:

- Will the appeals court grant a stay of the preliminary injunction imposed by the CIT?

- If the government gets a favorable ruling on a stay, how quickly will it rule on pending China safeguard quotas and how quickly would quotas be imposed?

- If the appeals court rejects the motion for a stay, will the government pursue an appeal, and if it does, how quickly would a decision be rendered?

- If the domestic coalition’s threat-based petitions become irrelevant, as U.S. trade data accumulates and potentially reveals market disruption, and the coalition files market disruption cases, how long would that process take?

- Will the U.S. government “self-initiate” market-disruption cases, and what is the timeline?

- The domestic coalition that filed the China safeguard petitions has asked the government to release its import data earlier. Will the government release January import data earlier than mid-March?

Textile producers and importers have spent grueling hours calculating how long the two-track court process might take and have developed several possible safeguard scenarios and strategies.

Many importers claim the earliest the domestic coalition could refile the threat-based cases as market-disruption cases would be the end of April, which would mean a decision, according to the normal government process, would not be rendered until July.

If the battle plays out along those lines, importers will have effectively deactivated the China safeguard for the first half of the year. However, if the appeals court issues a stay, the threat-based cases will be allowed to go forward and the government has about a month left in the threat-based decision-making process.

In the meantime, apparel and textile imports are entering the U.S. market without quota restraints for the first time in decades, but the impact is still unknown because U.S. trade data for January won’t be released until mid-March.  This means China could be rapidly building up its trade levels.It is difficult to determine whether importers and retailers have shifted more business back to China because of the injunction. One importing source claimed many companies are taking advantage of the safeguard suspension, but many executives were reluctant to discuss anything on the record for fear the government or domestic coalition might use their words against them, either in the court case or in the safeguard petitions themselves.

Domestic producers, on the other hand, are growing more frustrated as each day passes because, at some point, their threat-based cases could become irrelevant if the court case and potential appeal drags on as they will be forced to file market-disruption cases by that time.

Peter Gaabe, chief operating officer of Carole Hochman Designs, said his company has been heavily entrenched in China for years and claimed various companies are analyzing various levels of “risk/conservativism” in their sourcing strategies.

He said the company will not benefit from the injunction because it has created even more uncertainty and unpredictability in the latter half of the year.

“For the most part, we made our commitments, and we have to live with them,” Gaabe said. “People made business decisions [last year, when threat-based safeguards were filed] to give up money and to leave money on the table because they couldn’t afford the risk, even though it might have been produced more cost-effectively in China.”

Wendy Wieland Martin, vice president of international trade services at Kellwood Co., also said the injunction “will not really have an effect on our business.”

“By April, statistics will become available on early 2005 shipping, and we fully expect the textile industry to file new petitions based on these numbers,” said Martin.

On the other end of the spectrum, more U.S. jobs are at risk and Chinese imports are the primary culprit, according to domestic associations.

“It was a full two years after China joined the WTO [in December 2001] that we were able to get relief from safeguards,” said Auggie Tantillo, executive director of the American Manufacturing Trade Action Coalition, in his testimony before a commission investigating China’s recent WTO commitments on Feb. 3.“During that time, 110,000 jobs were lost,” he said. “The safeguards will only work if they are allowed to take a preemptive [strike] against Chinese imports on the basis of threat.”

The Bush administration imposed safeguard quotas on the basis of market disruption on three Chinese categories last year, including bras, dressing gowns and robes, and knit fabric. Those safeguard expired at the end of the year, and the coalition has reapplied for another year of quotas for the three categories.

Cass Johnson, president of the National Council of Textile Organizations, said: “What stands to happen is that China could be eligible for much higher quota levels even if the process is allowed to move forward. A considerable delay of a month or two more can really begin having a serious impact on the industry.”

Johnson said it would take a few more months before the threat-based cases became irrelevant.

“If these threat cases are allowed to move forward, the government would have a month to make a decision [because that is where the injunction stopped the timeline],” said Johnson. “That means we could get a decision in March, April, May and June. We had gotten through two-thirds of the timeline required for the safeguard process before the injunction was imposed. We were almost there and we would have to make up all that time if we filed market-disruption cases.”

The debate over the China safeguards reached a peak earlier this month when importers and domestic groups testified at a hearing on Capitol Hill.

The two-day hearing Feb. 3 and 4 underscored the depth of the divide between the two sides and illustrated just how high the stakes are. The tension in the air was palpable as executives of importer and retailer associations sat at the same table with domestic textile association representatives to discuss their outlooks before the U.S. Economic & Security Review Commission.

In one exchange, Commissioner George Becker, a Democratic appointee and vice president and executive council of the AFL-CIO, asked Julia Hughes, vice president of international trade for USA-ITA, whether it was the goal of importers to replace the domestic textile industry with imported products.“What is the goal of the importers — to take it all?” asked Becker. “How much penetration will make them happy?”

“Absolutely not,” said Hughes. “That is not our goal. We want to have a strong U.S. textile industry, and we would really like to expand our closeness with the industry, which we have not been able to do at this point because we are lobbying against each other in so many ways.”

Becker replied that a 73 percent import penetration [for some Chinese apparel and textile imports released early from quota last year] does “not leave much for the textile industry in the U.S., does it?”

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