NEW YORK — Retailers run out of stock on key items just as the crucial holiday shopping season arrives, hefty apparel orders get stuck in Customs because of quota embargoes and ships remain floating off the West Coast, filled with goods that won’t be allowed to enter the U.S.
This story first appeared in the January 6, 2004 issue of WWD. Subscribe Today.
These are extreme scenarios, but are the sorts of situations retailers, vendors and importers could be facing at the end of 2004 because of a technicality that will affect the quota system in its last year.
For the past three decades of the quota regime, importing nations including the U.S. have set category-by-category, country-by-country limits that dictate exactly how much textiles and apparel can cross their borders, and from where they can come. For the past nine years, the U.S. and the other 145 members of the World Trade Organization have been phasing out those quotas, with the goal of creating freer trade.
But importers will face one last hiccup later this year. Up to 2003, countries that had bilateral textile agreements with the U.S. were able to take advantage of a mechanism called “carry forward” that allows them to borrow up to 6 percent of the following year’s quota. In practice, this provision has allowed countries that have had problems with quota management to avoid having goods embargoed at the end of a year.
However, the nations of the WTO are set to drop their quotas on textiles and apparel on Jan. 1, 2005. Since there will be no 2005 quotas to borrow against, there will be no carry forward available at the end of this year.
Importers said the absence of carry forward will likely cause some logistical headaches.
“We’re closely monitoring this issue,” said Isaac Dabah, chief executive officer of the jeanswear group at Jones Apparel Group, in an interview at his New York offices. “It’s definitely going to be a big deal in China. As for the other countries, it will be less of a deal.”
George Ling, chairman of the $1 billion Hong Kong-based sourcing company Newtimes Group Holdings Ltd., said while carry-forward rights typically affect only small orders, they are “essential to an exporter when there is an overwhelming demand of such quota in the market.”
The problem is seen as being particularly acute in China because of that nation’s massive growth in shipments to the U.S. According to the most recent Commerce Department data available, for the 12 months ended in October, China’s shipments of textiles and apparel to the U.S. were up 40.5 percent, to $11.38 billion. That growth rate was almost quadruple the U.S.’s net 10.7 percent increase of imports in those product areas.
The Bush administration decided in November to place safeguard quotas on some of the few categories of Chinese imports that had already been freed of the restrictions, including bras and knitted fabric. That move has many within the import community worrying that whoever is sworn in as president in January 2005 might move quickly to crack down on Chinese imports if they take off after quotas are lifted.
For importers who rely heavily on China, Dabah said, “If they put the safeguard protections in place in early 2005, you’re sunk.”
Some sources have argued that denying carry forward at the end of 2004 would have the effect of reducing imports at a time when the nations of the WTO are trying to grow world trade.
In a letter to President Bush last month, four importer-heavy trade associations wrote: “A serious crisis is going to arise: There is going to be a shortage of quota available to meet the demands of the U.S. market in 2004. It is essential that the administration act to ameliorate this looming problem, which threatens to encourage companies to ship early in 2004, to seriously raise prices for textile goods for American families and to leave store shelves empty in the fourth quarter of the year, particularly around the important holiday selling season.”
The letter was signed by the American Apparel & Footwear Association, National Retail Federation, International Mass Retail Association and U.S. Association of Importers of Textiles & Apparel. The four associations claimed many countries will actually have less market access in 2004 than they had in 2003.
However, according to trade officials, most countries will end up with more quotas in 2004 than in 2003 because annual growth rates for most smaller developing countries are larger than the average carry forward of 6 percent. For instance, Bangladesh’s annual growth rate is 12.9 percent, which means that even subtracting the 6 percent carry forward from its imports for the year, it would still have room to grow, albeit at a lower rate.
Lobbying groups for domestic textile manufacturers have pointed out that countries in sub-Saharan Africa, the Caribbean Basin and elsewhere also have the right to export quota-free to the U.S. because of trade-preference programs. U.S. officials have emphasized that the carry-forward issue should be no surprise to those in the trade community.
“Everyone knew that going in and if countries made a conscious decision in 2003 to use carry forward from 2004, which would reduce their base limits in 2004, that was a decision they made,” Jim Leonard, deputy assistant secretary of textiles, apparel and consumer goods at the Commerce Department, said in September.
With the presidential election ahead and jobs — particularly in the struggling manufacturing sector — likely to remain a key political issue, sources agreed it is unlikely that the current administration would bend on carry forward.
Peter McGrath, president of purchasing at Plano, Tex.-based J.C. Penney Co., who is also chairman of the USA-ITA, said in a phone interview, “I don’t hold high hopes up.”
Developing nations took the matter up in a WTO session in Geneva last month. India’s WTO ambassador, Kesava Menon Chandrasekhar, spoke out on behalf of 16 such countries, including Bangladesh, China, Pakistan, Thailand and Indonesia. He asserted that denying any form of carry forward would cost jobs in many exporting nations.
He said studies have shown that denying carry-forward rights could cost Bangladesh $100 million in exports and 25,000 jobs, and could cost Pakistan $120 million in exports and 24,000 jobs. Those figures take into account those nations’ exports to all the world, not just to the U.S.
In closed-door WTO talks last month, representatives of the U.S., European Union and Canada were adamant that there would be no carry forward at the end of this year, according to sources.
“They are not giving us any positive hope,” said one Asian trade diplomat who participated in the meeting and spoke on the condition of anonymity.
Presuming the U.S. sticks to its guns and does not provide additional quota growth at the end of the year, importers are preparing for a complicated 12 months.
Using the three-digit codes that Customs uses to classify imported products, Penney’s McGrath said, “Critical categories, like 347 cotton bottoms and 338-339 knit tops, those are probably going to be the most problematic throughout the course of the latter part of the year. We will see quota shortages occur and that will have a rippling effect as people try to look for additional quota” in countries with lower fill rates.
He predicted: “The most problematic quarter that we’ll face in recent history will be the last quarter we have quota.”
Importers said there are two main approaches that people will take to try to avoid yearend quota hangups. One option will be ordering some goods earlier than usual.
“People won’t wait till the last minute to ship the goods,” said Charmaim Chow, director of woven casuals at Newtimes.
For the past several years, retail buyers have typically tried to delay ordering as long as possible, to provide them more time to assess what fashion and economic trends would be affecting the market when the goods hit store shelves.
Ordering earlier will likely leave them nervous, Chow predicted, adding, “They will order things that are more basic, cheaper and lower priced.”
The other option will be holding off on ordering goods that normally would be shipped in December, instead planning to have them shipped in January 2005. That’s a possibility for which shipping executives are preparing, according to Brian Moore, director of apparel sales at the Madison, N.J.-based carrier Maersk-Sealand Inc.
“Normally, we end up with a big yearend rush, where everyone is trying to get cargo out by Dec. 31 to use up quota,” he said. “Maybe we will have to hold these ships till Jan. 1, rather than Dec. 31, just on the other side of midnight.”
Executives emphasized that there’s no way to generalize about embargo problems.
“It depends on which country you talk about,” said Newtimes’ Chow. “Each country has its own issues. Also, it really depends on the category.”
Several sources said the approach they’re taking is looking at categories and countries that were embargoed last year, such as cotton trousers from the Philippines and knit shirts from Pakistan, and figuring those categories are the most likely to cause problems this year. Other countries that used a lot of their quota last year included Thailand, Taiwan, India, Hong Kong, Bangladesh and Mexico.
Imports of several categories of Vietnamese apparel and textiles embargoed last year and growing exports from that country make it likely to face embargoes again this year. Vietnam is not a member of the WTO, which means its imports will still be subjected to quotas in 2005. In theory, this could mean that carry forward would be available to Vietnam at the end of the year, though U.S. officials said they have not made any decisions yet.
To calculate when to expect trouble in particular categories and countries, sources said to look at the dates when categories embargoed last year and to be prepared for embargoes to hit even earlier, as a result of orders being pushed up.
For instance, McGrath said he has called for all Penney’s orders of men’s and boy’s cotton pants from Bangladesh to ship by Aug. 1 to avoid quota hangups.
“We might be watching very closely in the month of June on where we are on [quota] utilization,” he said. “If it’s at 50 percent, maybe we don’t need the goods till Sept. 1 and we can wait.”
Executives said companies needed to prepare themselves to handle quota problems by lining up factories in alternate countries to shift orders into if embargoes prevent them from buying from preferred suppliers. The challenge in that will be to line up backup suppliers in countries that are less likely to have their own quota problems.
U.S. Customs has warned that it will strictly enforce quota rules until the system is ended. But officials there said they expected some exporting nations to try to run around the controls next year. Janet Labuda, director of the textile enforcement and operations division of the Bureau of Customs & Border Protection, recently quipped, “I’m going to call 2004 the year of shenanigans.”
Sources also said concerns about quota availability will likely wreak havoc with quota prices this year. In many nations, quota rights are traded as commodities. Typically the prices drop early in the year when the supply is plentiful, stabilize midyear when use rates become clear and then start to rise in the third quarter in categories where it appears that quota will be scarce.
Chow predicted an early spike in quota prices this year, as quota holders try to make the most of their last chance to profit from the rights.
However the carry-forward issue plays out, most sources agreed that the last year of the quota system will pose plenty of headaches for importers.
“It will be a mess all around,” said Stephen Lamar, vice president of the AAFA. “Normally people make estimates on fairly predictable trade patterns, but this last year raises a big question mark.”