By  on September 19, 2006

WASHINGTON — U.S. Customs and Border Protection officials have been holding shipments of shirts and sports jerseys from a particular brand, nearly a million in all and supposedly made somewhere other than China, at the Savannah Port in Georgia since June.

Enforcement officials chose to strike late last month, uncovering what they allege is a scheme to circumvent quotas on certain Chinese apparel products by claiming the goods were made in another country. The brand was not identified as the case is still pending.

The seizures, with a retail value of more than $14 million, were small potatoes in the grand scheme of Chinese apparel and textile shipments to the U.S., which rose 3.7 percent for the first seven months of this year, to 9.8 billion square meter equivalents, worth $13.2 billion.

But the pressures of the system of quotas on 34 types of apparel and textiles from China, which, in this case, might have tempted some nefarious types to illegally transship goods, are being felt throughout the industry. Most are paying to bring in goods under the quota system or buying goods produced in other, mostly Asian, countries.

The quotas, which cover goods ranging from knit fabric and polyester filaments to cotton trousers and sweaters, run through 2008 and are the product of several months of wrangling last year between the Bush administration and the Chinese government.

In general, the trade pact has had a calming effect in sourcing circles because, at least for now, it has brought a halt to the unpredictable safeguard quotas the U.S. began imposing on China in mid-2005. China agreed to the safeguard provision when it joined the World Trade Organization in 2001.

However, the Chinese government's application of the new quotas has been spotty, said producers, and an auction process apparently has increased costs and resulted in some of the quota going unused.

"It's a lack of transparency of the quota system in China," said Tom Haugen, president of sourcing firm Li & Fung USA. "Nobody wants to take a chance. There are no reliable numbers. There's essentially not much control in China, or not transparent control in China on the quota process, so fear makes people think, ‘Let's go somewhere else.'"As of the middle of last week, only the quotas on a few categories, such as trousers made of silk and vegetable fibers, were more than 50 percent filled, an unexpectedly low turnout, given that those quotas expire at the end of the year.

The system of restraint was designed to help the staggering U.S. textile industry adjust to the rise of China as a manufacturing powerhouse and has influenced where goods are made.

"You could argue that quotas are working," said a spokesman for the American Manufacturing Trade Action Coalition. "The growth from China has slowed. It has forced the importers to source from countries other than China. They're going to other Asian countries to some extent, but on the other hand, if you didn't have the quotas in place, you would see the Western Hemisphere producers losing more market share."

Comparing this July with last, and thanks in part to declines in goods covered under the China deal, imported Mexican apparel and textiles were down 9.7 percent and shipments of Canadian goods were off 14 percent by volume. Imports of apparel and textiles from a group of 24 countries in the Caribbean Basin inched up 1.2 percent.

With growth in categories covered under the China deal, South Korean apparel and textile imports rose 19.6 percent, while goods from Pakistan increased 8.3 percent, shipments from India gained 11.5 percent and Indonesian imports advanced 17.6 percent.

Even with the difficulties surrounding the implementation of the quotas, China has remained an attractive manufacturing base for apparel.

"China's got a lot of problems right now," said Li & Fung's Haugen. "It's still probably the best place to make things."

Companies across the industry seem wary of the quotas, but still drawn to the possibilities of China.

Joe McConnell, senior vice president of operations for Biflex, a $65 million innerwear and sleepwear resource, said a significant amount of the firm's production is done in Indonesia, in part because the country already has standing relationships with its factories there.

"We're also doing it because we're avoiding any kinds of issues with quotas in China," said McConnell.

Even so, Biflex does have production in China and is expanding its business there because of the raw materials and processes, such as embroidery, Chinese producers can offer."China is important for Biflex and is increasingly more important for us as we're looking for more fashion-forward product," he said. "If you're looking for basic production ... going to Sri Lanka, to Indonesia, you're going to find very competitive pricing. If we're looking for novelty fabrics or technical fabrics and possibly a fashion item, we'd be looking probably more toward China."

Importers increasingly point out that the primary draw of the country is not price.

"China's no longer the low-cost producer," said Thomas Travis, chairman of Sandler & Travis Trade Advisory Services. "They have the most integrated system and varied offerings that one can imagine, but they're not always the lowest-cost producer."

In addition to benefiting from infrastructure investments that have improved roads and ports, Chinese producers have ready access to many of the necessary raw materials.

On balance, the apparel sourcing scene since the implementation of quotas is how it has always been, in a state of constant change.

"Nothing is static," said Travis. "We've never been really static."

China is certainly no exception.

"There are still issues out there, constantly, that plague traders, whether its the definition of what sweaters are subject to quotas ... or just entry issues and allegations of illegal transshipments," he said. "These issues are still present and traders are having to grapple with and resolve these issues."

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