AS HOUSE OKS GATT, BIG CHANGES LOOM FOR U.S. SOURCING
Byline: Jim Ostroff
WASHINGTON — Although a crucial Senate vote still remains, Congressional passage of GATT could set in motion a tidal wave that will transform — and, some fear, overwhelm — the U.S. apparel sourcing industry.
The GATT Uruguay Round took a major step toward becoming law Tuesday evening, easily gaining House approval, 288-146. The vote, not unexpected, moves a new world
of apparel sourcing one big step closer to reality.
Eighteen months after creation under GATT of the World Trade Organization, on Jan. 1, an American quota vise will tighten on the U.S.’s largest apparel sources, China and Hong Kong, creating a scramble for alternative suppliers.
Investment capital likely will stream into now-small Pacific Rim apparel-producing outposts, the Caribbean Basin and Mexico.
Retail apparel prices, importers forecast, will begin to rise. At the same time, the GATT pact may create more fashion options for U.S. vendors and retailers, increase foreign sourcing of children’s wear and perhaps even hike retailers’ inventories of clothing made in the U.S.
In short, many trade analysts predict sourcing, as it has been practiced here for decades, will be turned topsy-turvy by GATT. And for retailers and importers, the most pressing concern is the change in the rule of origin for apparel imports mandated by the GATT’s implementing legislation.
Domestic industry officials concede major sourcing changes are inevitable, but assert retailers’ and importers’ doomsday scenarios are farfetched. The GATT provision most controversial for the textile and apparel business — the rule-of-origin change — was not in the pact made final in Geneva last December, after seven years of negotiations among more than 100 nations. It was added by the White House to the U.S.’s implementing legislation, after intense lobbying by domestic apparel and textile interests.
Effective July 1, 1996, apparel’s origin, for quota purposes, will be based on where garments are sewn and assembled, not where the fabric is cut. Fabric cut in Hong Kong, Singapore or Indonesia and assembled in China — a practice known as outward processing — will be charged against China’s U.S. import quotas. But since these quotas are filled each year and have an average 1 percent annual growth rate, the rule change effectively will end outward processing, which accounts for $6 billion of the U.S.’s $30 billion in imported apparel.
Even if China gained admission to GATT and its successor, the World Trade Organization, its access to the U.S. market would be curtailed until the Multi-Fiber Arrangement ends, and a quota-free regime takes effect, on Jan. 1, 2005. The U.S. has also agreed over the 10 years to cut its tariffs on textiles and apparel an average of 11.6 percent.
During the 10-year phaseout of the MFA, which currently governs quotas for the apparel and textile trades, quotas are to be removed from 51 percent of textile and apparel products traded worldwide in 1990. For products still under the MFA, quota growth would double over 10 years, a negligible increase for China, with its baseline 1 percent annual quota growth rate.
“The effect of the origin rule change could be as high as a 20 percent reduction in certain categories [of apparel] exported from certain Asian countries,” said Jim Kilgore, Levi Strauss & Co.’s customs and trade director.
The change, Kilgore added, “will cause a major disruption in the way business is done in China and Hong Kong and other Asian countries, because of pressure on quotas” as importers seek other sources to offset reductions. An industry adviser to the interagency Committee for the Implementation of Textile Agreements (CITA), the San Francisco-based Kilgore said this situation “will reach into the Caribbean, where people will have to go to source, where they haven’t in the past, which will put upward pressure on prices [for apparel] from that region.”
There’s hardly agreement about whether the Caribbean Basin nations will be a viable alternative source to the Far East.
“I anticipate the CBI will remain an important source for U.S. apparel companies, at least for several more years, due to its proximity, significant investments there and expertise in apparel-making,” said Tom Travis, managing director with Sandler, Travis & Rosenburg, a Miami-based trade consulting firm.
“Currently,” Travis said, “the CBI has [virtually unlimited] quota access to the U.S. and partial duty reductions under the 807(A) program” for apparel made there using U.S.-made and U.S.-cut fabrics.
Nonetheless, he and most U.S. apparel firms argue that the GATT’s eventual elimination of all quotas, and tariff reductions, will tip the balance in favor of Far Eastern sources, once the MFA ends.
“This effect can only be attenuated by granting the CBI parity with Mexico” under the North American Free Trade Agreement, Travis said.
Whether parity is granted or not, Laura Baughman, president, The Trade Partnership, Washington, and a retailer/importer consultant, forecast that the GATT origin rule change will add $200 to the average U.S. household’s annual apparel expenditures, due to higher costs.
Carlos Moore, the American Textile Manufacturers Institute’s executive vice president and a backer of CBI parity, said importers should be able to offset reductions in Far Eastern imports.
“Clearly, the trade taking place now in the CBI and Mexico is competitive,” Moore said. “If a company believes it will be adversely affected by the origin rule change, it can go to Mexico or the CBI right now and place orders for delivery in mid-1996.
“I can assure you, if a major importer went to the CBI or Mexico and ordered a program for 1996, a plant would be built, if necessary,” he said. “Building an apparel-making operation is not capital-intensive and you could get that supply very quickly.” Moore contended such a move would not drive up costs, reasoning the CBI, Mexico and the U.S. have a plentiful labor supply.
“In fact, one could argue that [sourcing] prices would go down, because you could build a modern apparel operation with the latest cutters and sewing machines to gain some real productivity,” he said.
Expanded apparel production in Mexico and the CBI probably will boost their consumption of U.S. fabrics, other trade analysts say.
Apparel production most likely would rise in the U.S. as a result of the origin rule change, said Larry Martin, the American Apparel Manufacturers Association’s government relations director and incoming president.
“Assuming the rule results in a decline in apparel imports, this should mean there will be an increase in production and sales opportunities by domestic companies,” Martin said.
He noted, “There are some fabrics that we have difficulty obtaining, and GATT may help us in the long run” by making it easier to import such fabrics.
Martin again said, as he has in the past, that a reduction in U.S. apparel imports would tend to increase their prices, “making domestic apparel more price-competitive.”
ATMI’s Moore also took issue with importers’ contentions that the origin rule change will create a sourcing scramble and cost millions of dollars in the search for new offshore manufacturers.
“The Limited is producing a season’s order every eight weeks or so, and with the change taking effect in July 1996, it’s ludicrous to say they can’t find other sources,” he said.
“It’s not like you’re building a steel mill. And besides, China, India and Pakistan may fill their quotas each year, but there is enormous quota capacity in many developing countries around the world that already are producing some textiles,” Moore said.
He sought to refute importers’ arguments that the rule change would create a quota squeeze that would raise consumer apparel prices. Moore said U.S. Customs Service data showed in 1993, apparel in 11 of 13 categories cost more when imported from Hong Kong than from China.
An ATMI fact sheet stated: “Importers claim that ‘enormous quantities’ of apparel are being cut in Hong Kong and sewn in China. However, the U.S. import prices of Hong Kong apparel shipments are consistently higher than [those of] Chinese goods, which means that someone is taking a high markup in Hong Kong, and which also makes it highly unlikely that those goods will be priced lower at retail than Chinese goods.”
Retailers and importers call this argument specious, claiming most apparel sourced from Hong Kong is cut and assembled there because there are no alternatives — hence the higher prices.
The origin rule change will force retail prices higher, they contend, because apparel will have to be produced in high-priced Hong Kong and elsewhere; China’s quotas cannot accommodate more growth.
Taking issue with Moore, Martin Trust, president and chief executive officer of Mast Industries, The Limited’s sourcing arm, said it could take up to four years to reestablish offshore apparel facilities, noting cutting, printing and dyeing operations would have to be moved wholesale to new locations.
“Besides huge costs for relocating facilities, you also must make big investments in training people to meet apparel quality standards,” said Laura Jones, executive vice president of the U.S. Association of Importers of Textiles and Apparel.
“If you’re sourcing 600,000 dozen garments using outward processing,” Jones added, “it’s not easy to find new countries, especially since the Clinton administration cuts off at the knees emerging new suppliers like Kenya, El Salvador and the Ukraine by imposing tight quotas the minute they develop.”
Some apparel houses say they have no choice but to source from China.
“With or without GATT, we are not in a position to source silk from anywhere else,” said Tom Murry, president of Tahari Ltd. While Tahari sources bottom weight goods in South Korea and knits from Hong Kong, Murry said, “We are in bridge [silk apparel] and our sourcing needs are unique. There is no other place but China that can do the quality work at a price that we require.”
But many other apparel firms, Jones said, already were rushing to find alternatives to China.
“It’s not that an earthquake has occurred where people are running for their lives, but companies cannot wait 18 months for the origin rule change when production is planned more than one year ahead,” she said.
The shift may occur faster than some expect, said Eugene Milosh, president of the U.S. Association of Exporters and Importers.
“The key is the decision by the Asia-Pacific Economic Cooperation group to create the world’s largest free-trade area early in the next century,” Milosh said. “With this assurance, you’ll see investments of all kinds shifting to the Pacific Rim countries fairly quickly — certainly much faster than they did in China.”
Jones, though, sees another GATT problem looming, based on the way CITA handled the quota phaseout requirements.
It first enlarged the universe of textile and apparel products traded worldwide, she said, and in the initial, three-year stage, eliminated quotas on goods that were not under quota. The schedules of products to be included in the second and third stages are to be released by April.
“Because of CITA’s actions, when the 10-year MFA phaseout is finished, rather than 51 percent of textiles and apparel being integrated into the GATT quota free, it will be more like 40 percent, leaving 60 percent to be integrated at 10 years plus one day,” Jones said. “As we come up on the 10-year mark, you can imagine the domestic industries’ cries to the White House, lobbying for yet another MFA extension with the argument that the ’60 percent cliff’ will destroy U.S. production.”
Baughman of The Trade Partnership, also raised the specter of this scenario. But if the MFA ended on schedule, she added, positive changes could be made in the U.S. apparel business.
“At times, fashion is actually driven by quotas, or rather the lack of them. Assuming quotas eventually are eliminated, it would open up whole new avenues for retailers to come up with new fashions that they just cannot do now because of sourcing restraints,” she said.
In addition, Baughman said the GATT could create a new sourcing sector.
“Today, it doesn’t pay to import much children’s wear because these use up scarce quota and kids’ wear doesn’t earn as much money” for retailers as adult apparel.
An easing of quotas, she said, “will make it a whole lot more practical to get kids’ wear at prices people can afford.”
However, Baughman, like other import industry analysts, cautions retailers against setting up children’s apparel sourcing programs in China any time soon.
“There is not a whole lot of chance that this administration will ever help China on the textile front. The betting is, it will find some way to deny China MFA phaseout benefits,” she said, even if China is admitted into the GATT and WTO.
Administration textile officials have discussed a scenario in which the U.s. could invoke a GATT provision to deny China trade benefits until it adopts practices found in most capitalist economies.
— Fairchild News Service