WASHINGTON — Congress will consider legislation to crack down on textile import fraud, which is battering the weakened domestic industry.
This story first appeared in the May 25, 2010 issue of WWD. Subscribe Today.
Yarn spinners and denim fabric makers said they have suffered major damage from the increasing illegal activity that undercuts their $10.2 billion export business to Central America, Mexico and four Andean countries, all of which have duty preferences with the U.S.
U.S. Customs & Border Protection Customs officials and industry executives said the fraud is carried out primarily when foreign manufacturers use phony affidavits — often copies of certificates from legitimate U.S. textile companies — to falsify that their yarn or denim fabric was made in the U.S. when it was actually produced in China or other countries. That allows them to take advantage of duty free benefits under U.S. trade agreements such as the Central American Free Trade Agreement and the North American Free Trade Agreement.
Seeking to counter the fraud, four congressmen from the textile producing states of North Carolina and South Carolina plan to introduce legislation today that would give Customs more resources and authority to clamp down.
The Textile Enforcement and Security Act, sponsored by Reps. John Spratt (D., S.C.), Howard Coble (R., N.C.), Larry Kissell (D., N.C.) and Walter Jones (R., N.C.), is intended to close enforcement loopholes by placing additional Customs inspectors in Central America and Mexico, expanding penalties to more firms in the supply chain, decreasing the use of “blanket” affidavits that certify all imported products comply with U.S. rules and starting a verification system to track yarn and fabric in regions that have free trade agreements with the U.S.
The textile industry has lost hundreds of thousands of jobs in the last three decades because of factors such as automation, cheaper labor overseas and advances in textile production abroad.
“We have had some of our own certificates of origin over the years used by foreign companies to bring in Pakistani yarn to Central America to get duty free access to the U.S.,” said Andy Warlick, president and chief executive officer of Parkdale Mills Inc., a Gastonia, N.C.-based yarn producer. “We’ve lost a lot of jobs and there are several reasons for that, but one of the biggest reasons is this blatant fraud. We’re talking about products we can compete on, but we can’t compete unless everybody plays by the rules.”
Warlick estimated textile fraud and inadequate Customs enforcement was responsible for 1,200 of the 2,200 jobs the firm has lost in the last 12 years.
Bill Jasper, president and ceo of Unifi Inc., a maker of synthetic yarns based in Greensboro, N.C., which exports about $200 million worth of textiles annually to Mexico and Central America, said the company has lost about 3,000 jobs over the past 10 years largely because of fraud.
“The bill…puts in place the right resources for Customs and gives them the authority to deal with the fraud,” Jasper said.
Industry executives contend that companies are facing a sharp increase in illegal trafficking of imported textiles, particularly combed cotton yarns used in apparel production in Central America and denim fabric used to make jeans in Mexico, along with other synthetic yarns and fibers.
“We have seen a rapid increase in illegal fraud coming out of CAFTA [the U.S. trade agreement with five Central American countries and the Dominican Republic] and NAFTA [the agreement with Mexico and Canada] regions as unscrupulous importers and producers have progressively discovered that there is very little that they cannot get away [with],” Cass Johnson, president of the National Council of Textile Organizations, said during a congressional hearing last week. “This has meant good manufacturing jobs leaving this country because our members are losing more and more orders to Asian yarn and fabric producers that are illegally claiming their goods are made in the United States.”
Last year, the government reported that almost twice as much combed cotton yarn was exported from the U.S. to the CAFTA region than was actually produced, Johnson said.
“In addition, a number of phony companies have created Web sites purporting to produce U.S. yarns and fabrics for use in the CAFTA region, but Customs has been unable to move effectively against them,” he said. “Recent information from Mexico shows that up to a third of denim jeans which claim NAFTA origin may be made of Chinese fabric.”
Janet Labuda, director of Customs’ textile/apparel policy and programs division, acknowledged that textile fraud is rising.
In the 2009 fiscal year, $94.5 billion in textile and apparel products were shipped to the U.S., according to Customs. About 18 percent, or $17.5 billion, was claimed as a duty preference. Officials said 46 percent of the “targeted” preference claims did not comply with free trade rules, meaning they could be fraudulent, mislabeled, undervalued or transshipped. The non compliance percentage was up from about 35 percent in previous years.
Fraudulent claims can take many forms, ranging from falsified affidavits of country of origin to false short supply claims, in which companies say U.S. domestic producers cannot make a product in a commercially available manner and try to use foreign materials in apparel production in the CAFTA and NAFTA regions and get a U.S. duty free preference.
“Various, nefarious people are establishing bogus companies in the U.S. to [help falsify affidavits of yarn or fabric made in China or other countries],” Labuda said. “They hide in other countries to perpetrate this fraudulent activity.”