The Quota Quotient

WASHINGTON — The battle over Vietnam quotas might be over on paper but it has just begun in boardrooms across the country.<br><br>In the aftermath of one of the most contentious negotiations ever over a bilateral textile agreement, many...

WASHINGTON — The battle over Vietnam quotas might be over on paper but it has just begun in boardrooms across the country.

This story first appeared in the May 20, 2003 issue of WWD.  Subscribe Today.

In the aftermath of one of the most contentious negotiations ever over a bilateral textile agreement, many importers and retailers are trying to determine whether there will be enough quota to cover the orders they have planned for the region.

On the other side of the divide, the domestic textile industry, which vehemently opposed the final agreement, is still reeling from what it claims are excessively high quota levels and assessing what the damage to U.S. manufacturers is likely to be.

According to the agreement between the U.S. and Vietnam, which took effect May 1, quotas on 38 apparel and textile categories will increase 7 percent annually for cotton products and 2 percent annually for wool.

The deal will allow Vietnam to expand its apparel and textile exports to the U.S. from $49.3 million in 2001 to roughly $1.7 billion this year.

Trade officials will prorate the quotas on the 38 categories from May through December, which means they’ll allocate as much quota as would have been left if Vietnamese exporters had started consuming the quota at an even rate in January.

Retailers are concerned that many of the categories will embargo early in the year, including one that they said may fill as early as June, based on the prorated levels and average growth rate in the first two months of the year.

However, just a week after the quotas were imposed, some apparel retailers and manufacturers said they won’t immediately be affected by the limits. They claimed that months ago they found alternative sourcing in Asia in preparation for the quotas.

“We have been laying plans for months in anticipation of restrictive quotas,” said Peter McGrath, president of purchasing at J.C. Penney Co. “We are taking the steps necessary to ensure our goods are not embargoed, including moving [sourcing] to other Asian countries.”

He said J.C. Penney moved production of cotton trousers, its biggest category in Vietnam, as well as swimwear, out in time.

“You have to have a process in place, understand surges within a category and try to anticipate a high-risk zone,” said McGrath. “It is too costly to lose goods and air-freight goods because of an embargo.”

J.C. Penney predicts swimwear could embargo by the end of June while skirts, cotton trousers and men’s and boys’ wool trousers could embargo in August, according to McGrath, who also serves as president of the U.S. Association of Importers of Textiles and Apparel.

If goods do embargo, a retailer like J.C. Penney would have to send its buyers out to find goods from other vendors to fill the category and the quality might not be as good, he said.

Seattle Pacific Industries, the maker of Unionbay in Seattle, Wash., has two big categories in Vietnam: knit tops and cotton trousers, according to Steve Ritchey, president and founding partner.

“We are in good shape because we adjusted accordingly and moved to other Asian countries,” said Ritchey.

Ritchey said the company did not place orders for July or August in Vietnam because executives wanted to see what the agreement would restrict.

“Next year poses a bigger concern for us than this year because there is not a lot of chance to borrow from future years as we did in the past,” he said.

Typically, when quotas fill toward the end of a calendar year, exporting countries are able to avoid having goods held up at Customs by dipping into their planned quota allocations for the coming year. But the quota system for apparel and textiles is to come to an end on Dec. 31, 2004, which means that there will be no 2005 quota to borrow against.

“We are flexible and we always have six or seven countries to balance out a season’s production,” Ritchey said. “We’ve always kept a good balance for big categories and manufacturing close to time also helps us be flexible.”

Donald Levy, president and chief executive officer of The Levy Group, which produces and licenses Liz Claiborne coats and men’s outerwear as well as Dana Buchman and Esprit, said he was pleased that his largest category, man-made-fiber coats, did not receive quotas.

But officials did impose quotas on a number of other categories his firm sources there, including cotton coats, wool coats, synthetic trousers and cotton trousers.

“Those quotas will affect me, but fortunately my biggest category was not restricted,” he said. “The U.S. government did one good thing — it gave everyone adequate notice and everybody is prepared, although nobody likes it.”

The U.S. moved to set limits on Vietnamese imports at the behest of the domestic textile industry, which was alarmed by Vietnam’s steep increases in apparel and textile shipments.

The beleaguered textile industry has been shedding jobs over the past three decades, following years of trade agreements with Latin American, Caribbean, African and Asian countries.

Apparel employment in April fell below 500,000 for the first time on record and now stands at 495,000 while the textile industry employs 409,000 people.

“A lot of knitting mills will close as a result of this agreement,” predicted Charles Bremer, vice president of international trade at the American Textile Manufacturers Institute. “If you look at the numbers in this agreement, that is an enormous amount of fabric we are not selling to Mexico or the Caribbean.”

The concern is that apparel currently made in the Caribbean out of fabrics knit in the U.S. would instead be bought from Vietnamese suppliers and made of Asian fabric.

Jerry Rowland, president and chief executive officer at National Textiles in Winston-Salem, N.C., said the quota levels given to Vietnam will hurt the industry as a whole and could indirectly hurt his knitting business.

He said the quota level for Vietnam of 14 million dozen cotton knit shirts and blouses is equivalent to half his knit business, which is strictly sold to Central America, Mexico and the Caribbean. His biggest customer is Sara Lee.

“Our industry is most successful in conjunction with Mexico and Central America in knitwear, gabardine pants and denim, and those are the areas the U.S. Trade Representative just gave away to Vietnam,” he said.

Rowland said Vietnam could have an effect on other businesses, such as ring-spun yarn, which could get a boost from the Central America Free Trade Agreement currently being negotiated.

“One of the things we will be able to do under CAFTA is to manufacture yarn in Central America but we will have to prove that we can beat countries like Vietnam,” he said.

Meanwhile, companies like Guilford Mills, which in recent years spent some time and dramatically downsized its apparel fabric business, have already been impacted by foreign imports, according to John Emrich, president and chief executive officer of that Greensboro, N.C.-based mill.

While Emrich said he does not foresee any direct impact from the Vietnam deal on his apparel fabric business, which represents just 10 percent of his total company, he said he thinks the pact will lead to further job losses in the industry.

“This is just another example in a long line of trade policies that lack good negotiating and have just decimated our industry,” he said.