AFRICAN TRADE NO EASY NUT TO CRACK
Byline: Scott Malone
MIAMI BEACH — With opportunity can come new challenges.
Such has been the case with the Trade and Development Act of 2000, which created a bevy of incentives for U.S. apparel importers to expand their operations in the Caribbean Basin and sub-Saharan Africa. But it also brought a bewildering array of new trade requirements and opened the door to a number of new uncertainties.
“One of the things we do constantly is look at the news and ask, ‘what brilliant strategy did we have yesterday that has us asking today, why did we put goods there?”‘ Rod Birkins, director of sourcing for private brands at J.C. Penney Co. Inc. of Plano, Tex., said at last week’s Cotton Sourcing Summit.
Madagascar was cited as the clearest current example of the unknown factors that can entangle international trade. A disputed December presidential election on that island nation led to a series of general strikes and has brought the nation’s developing apparel industry — last year its sales rose 25 percent to $215 million — to a near standstill.
“The present situation is a complete disaster for the export sector,” said Mathias Ismail, general director of joint ventures and marketing at Groupe Socota Industries, with its Malagasy operations based in Antsirabe.
Ismail was the sole representative of that nation’s apparel industry at the three-day meeting, which ended at the Loew’s Miami Beach Hotel last Tuesday.
Ismail, who spoke on April 15, said his company as of last week was still spinning and weaving cotton in Madagascar, but had to idle its dyeing plants because its fuel supply had run out. He added that the company had moved some current production to Sri Lanka and Mauritius, where the firm also has operations, to ensure that customers receive goods on time.
By Thursday, the two men who claimed Madagascar’s presidency had agreed to a second-round election if a recount of the ballots proved inconclusive. Still, the months of unrest had a devastating effect on Madagascar’s developing industry, which last year enjoyed a 25 percent growth in apparel sales.
Birkins said the unrest in Madagascar has been enough to give Penney’s second thoughts about sourcing there.
“Our deliveries are being impacted, so we are re-evaluating that decision,” he said, adding that he regards some unrest as a fact of life in the countries where Penney’s sources. “We normally operate where people are poor. We are an industry that helps lift people out of poverty. But when you have people who are poor, you have instability.”
He said the store had continued to source from Pakistan over the past seven months, finding that the military campaign in Afghanistan did not affect deliveries.
While the Africa Growth and Opportunity Act and Caribbean Basin Trade Partnership Act, components of the TDA 2000, were designed to encourage apparel manufacturers in those regions to use U.S.-made fabric, the encouragement has proved less enticing in Africa than in the Caribbean.
That’s largely because AGOA allowed lesser-developed beneficiary nations to ship garments made of third-country fabric and still qualify for duty and quota-free treatment through Oct. 1, 2004.
Rosa Whitaker, assistant U.S. Trade Representative for Africa, said, “The special provision allowing poorer countries to import third-country fabric was important to lesser-developed countries.”
Julie Hughes, vice president of international trade and government relations at the U.S. Association of Importers of Textiles & Apparel said 97 percent of last year’s imports from sub-Saharan Africa that qualified for AGOA treatment were made of non-U.S. fabric. Only 30 percent of all shipments from the region qualified for AGOA treatment.
Janet Labuda, director of textile enforcement and operations at the U.S. Customs Service, noted that overall textile and apparel shipments to the U.S. from Lesotho, which met the lesser-developed standard of having a per-capita gross domestic product of $1,500 or less in 1998, rose 53 percent last year. At the same time, shipments from Botswana, which didn’t meet the lesser-developed standard, declined 62 percent.
Thomas Haugen, executive director of the $4.5 billion Hong Kong-based trading company Li & Fung (Trading) Ltd., said his organization sourced 5 percent of the apparel it sold last year from the AGOA region.
“It will be even larger this year,” he said, as more countries are admitted into the program, particularly lesser-developed ones, because, “we can use that great Asian fabric.”
Still, he added that his company also specifies Asian-made fabric in about 90 percent of the garments it produces in the Caribbean Basin — even though it misses out on duty breaks that way — because they are less expensive than U.S. fabrics.
Speakers at the event said the complexity of the African and Caribbean guidelines, which are driven by a political debate so fierce that 19 months after the new trade laws went into effect the Customs Service still has not put out its final rules on compliance, have limited the growth potential in those regions. The rules offer benefits for several categories of garments, which can be made of U.S. fabric — or in the Caribbean, U.S. yarn that is locally woven — but contain a number of exemptions for bras, socks and other categories that executives are still digesting.
Mark Neuman, counselor for international trade and global strategies at The Limited Inc. of Columbus, Ohio, said the intricate rules of the new trade regime “poisoned the potential for trade growth+What we saw in terms of complexity was a disaster for us.”
The rules are so complicated that Congress specified that it’s the duty of the Customs Service to train its counterparts in the affected African nations to enforce the law and make sure goods that don’t qualify for duty-free treatment are not being transshipped through participating countries.
“Most of the time we were looking for origin fraud,” Labuda said. “Now, we’re looking to see, do these factories have the procedures in place to see if this factory claimed CBTPA or AGOA benefits, should they get it?”
To ensure that no illegal shipments slip through, particularly from AGOA nations that have less experience with U.S. import procedures, Customs is requiring all AGOA nations to send their export data to the U.S., where it is reconciled with import data.
“We’re having some difficulty with reconciliation,” acknowledged Labuda, adding that the system is being improved.
She emphasized that it’s critical for U.S. importers who plan to take advantage of CBTPA or AGOA trade benefits to tell their suppliers their intentions. She said her agency recently inspected a Caribbean factory and found that it had no certificates of origin for an order shipped to the U.S.
“They didn’t know the importer they were supplying was claiming CBTPA,” said Labuda, who added that Customs found the order did not qualify for the duty breaks.
While the new trade laws have added another layer of complexity to importing, Jane O’Dell, vice president of international trade and Customs compliance at Limited, said the threat of terrorism is going to give foreign contractors even more to track.
“A new and primary concern for Customs and all of us as importers is to make sure our shipments are safe from being used as a vehicle to introduce terrorists’ weapons or terrorists into the U.S.,” she said.
Limited and other importers will be asking their foreign suppliers new questions, she said, such as: “What are you doing to have secure perimeter controls and how do you approve the hiring of your new associates?”
While there was already a large import apparel trade between the Caribbean Basin and U.S. prior to the new trade law taking effect, Caribbean sourcing since then has not grown as quickly as some had hoped. Last year, overall imports from the Caribbean were down 2 percent to $9.5 billion, according to Labuda. Executives have attributed that decline to the slowdown in the U.S. economy and consumer spending.
But another hurdle stands in the way of a pickup in Caribbean trade growth: financing. While bank and factor executives contend they’ve made headway into the region over the past year, they acknowledge it has not been an easy region for expansion.
Carlos Arias, executive vice president of the Guatemalan apparel producer Koramsa, said he believes U.S. banks’ unwillingness to factor Caribbean transactions has been a major obstacle to the region’s growth.
“One of the huge factors behind the success of the Orient was that the banks were able to understand that business and get behind it,” he said. “It’s still hard to finance in the CBI.”
Keith Hull, president of marketing and sales at Graniteville, S.C.-based Avondale Mills Inc., said when it comes to building his sales to the Caribbean, “financing is the biggest problem. In fairness, the banks have a lot to do to manage and evaluate the credit risk.”
Peter Mulroy, vice president of international financing at Atlanta-based SunTrust Bank Inc. said lower legal requirements on financial disclosures, as well as a less-sophisticated approach to corporate finance among Caribbean apparel makers, has made it difficult to finance transactions in the region as easily as can be done in the U.S.
“In many countries, bankruptcy laws are archaic,” he said, referring to Latin American nations. “Once you go in, you can’t get out.”
Roger Welker, a Miami-based vice president with CIT Group, added, “the most critical credit issue in being able to deal with the Caribbean Basin+has been the lack of financial details presented on a timely basis.”
While financing has been an obstacle to the growth of apparel trade between the Caribbean and U.S., there have also been significant cultural differences. Among the key problems is that many of the large Caribbean factories that are equipped to provide full-package garments are owned and managed by Asians, and that some U.S. textile executives, after years of complaining about cheap imports from Asia, are reluctant to do business with them.
The event included two afternoon trade fairs, one for U.S. mills looking to increase their sales to the Caribbean and sub-Saharan Africa, another for contractors in those regions.
Foreign executives at the conference, which attracted about 400 apparel and textile sourcing officials from the U.S., Caribbean, Africa and Asia, said they were pleased to see that U.S. mill executives seem to be becoming more open to doing business.
Hyun-Cheol Cho, general manager of the garment export department at Hanil Synthetic Fiber Co., a Seoul-based company with garment factories in Honduras, said after CBTPA went into effect, he started looking for U.S.-made fabrics to see if his company could benefit from the duty breaks. Last year, he said, U.S. executives seemed disinterested in his inquiries.
“Now, the U.S. industry is going down a little and that is an incentive to find a solution,” he said, adding that U.S. fabric mills and Caribbean garment producers need to make a greater effort at getting to know and trust one another.
“We’re interested in long-term business relationships,” he said. “We don’t work short term.”
At Avondale, Hull said he’s making a greater effort to get to know the Asian management of Caribbean garment plants and is sending a delegation to South Korea to meet with factory owners.
Hull said he has learned that even factories that had imported fabric from Asian mills owned by their parent companies have started to look at U.S. sources of supply.
“They make a pure pricing decision,” he said. “Sometimes that leads them to buy out of the U.S.”