WASHINGTON — Importers have one last snag to work their way through — having enough quota to finish the year — in the final six months of the quota system.

This story first appeared in the July 6, 2004 issue of WWD. Subscribe Today.

While next year they’ll be able to buy unlimited quantities of textiles and apparel produced in any of the 147 World Trade Organization nations, this year they’re looking at the possibility of not being able to receive deliveries late in the year of products including cotton pants from India, cotton skirts from China and T-shirts from the Caribbean. Those categories have respectively filled 62 percent, 68 percent and more than 83 percent of their quota allocation so far this year.

With those numbers in mind, companies including J.C. Penney Co., Wal-Mart Stores and Gap Inc. are putting in place measures to ensure they still have supplies available later in the year.

This problem is the result of a quirk in the interpretation of the quota rules, which have governed the world trade in garments and fabrics for more than three decades. The U.S. — like many other importing countries — sets annual quota limits on particular countries for certain categories of merchandise. When an exporting country reaches its limit in a given category of goods, the category is said to be embargoed, which means that country can ship no more goods of that kind until the new year.

In years past, companies that ran into unexpected embargoes were allowed to work around them through a program known as “carry forward,” which allowed them to borrow against the next year’s quota allocation. Since the WTO nations are dropping their quotas on textiles and apparel on Jan. 1, there are no 2005 quotas for companies to borrow against this year.

To prepare for embargoes, importers are closely watching quota fill rates and preparing to turn to back-up suppliers in other countries if their primary suppliers hit their quota limits.

Peter McGrath, president at J.C. Penney Purchasing Co., said his team has studied quota utilization on an historic basis and percentage use this year to attempt to forecast quota embargoes.

“When we have forecasted [an embargo] date for a product and country, we usually back off of that by 30 days and that becomes our closure date,” McGrath said.

He said the booking volume in Central America is up substantially in anticipation of early embargoes in other parts of the world. Countries like Kenya and Egypt are also good sourcing alternatives, he said.

Importers are also keeping a close eye on Vietnam, which is one of the few key suppliers of textiles and apparel to the U.S. that is not a member of the WTO. That means that its trade with the U.S. will remain regulated next year by a bilateral trade deal.

Under the agreement, Vietnam is eligible for carry forward if the deal is extended and not renegotiated or terminated. The most immediate concern for importers is whether the U.S. will grant Vietnam additional quotas through carry forward this year.

The U.S. recently reduced Vietnam’s apparel quotas by 12 million garments after an investigation revealed clothing shipped to the U.S. was falsely identified as “Made in Vietnam,” though it had been made elsewhere.

“Vietnam has always provided a little safety valve [when quotas in other countries start filling], but with quotas pared back for Vietnam it negates any increase we would expect under the bilateral agreement,” said Erik Autor, vice president and international trade counsel for the National Retail Federation.

Five apparel and textile categories from Vietnam were filled 50 percent or higher as of June 28, according to U.S. Customs and Border Protection. (see chart, opposite page.)

The second big quota issue is a rapidly filling T-shirt limit under the Caribbean trade preference program. Through a special program, companies in the Caribbean, primarily in Honduras, can take U.S.-made yarn, have it knit into fabric in the region, cut and sew it into T-shirts, and then ship it back to the U.S. free of duties. Up to 10 million T-shirts may enter the U.S. this way. After that limit is reached, Caribbean suppliers must use fabric knit in the U.S., under the rules of the Caribbean Basin Trade Partnership Act.

U.S. yarn spinners said they have benefited greatly from the T-shirt cap, but noted the quota category is now more than 80 percent full.

Mike Hubbard, executive vice president at the American Yarn Spinners Association, said the quota cap is expected to be filled by the end of this month and U.S. yarn makers stand to lose thousands of dollars in business until the new quota year, which for this program begins on Oct. 1. (The general quota year begins on Jan. 1.

“There will be two months of lost business and many Central American companies will be forced to shut down or find other suppliers and pay a duty,” said Hubbard. “If they have to pay a duty, they will not feel obligated to use U.S. yarn and they will find cheaper yarn.”

The U.S. shipped 351 million pounds of yarn and thread to Central America in 2003, according to Hubbard. He said producers are counting on legislation introduced by Rep. Sue Myrick (R., N.C.) last week that would raise the cap by 20 percent to 12 million dozen this year.

Passage could be difficult given the truncated Congressional calendar due to the elections. Congress is scheduled to adjourn from the last week of July until Oct. 1, and then return for a short session before the Nov. 2 election.

Other countries and quota categories are also on importers’ and retailers’ radar.

“The highest fill rates we have so far are the usual list of suspect categories and countries,” said Autor.

Many companies expect early embargoes on: cotton dresses and skirts from China, cotton and man-made fiber dresses and cotton trousers from India, cotton trousers and tops from Vietnam and man-made fiber trousers from Bangladesh, he said.

“We’ve always been concerned about the lack of carry forward this year coinciding with a period of economic pickup,” said Autor. “Retail sales will pick up because demand picks up, but the supply isn’t able to match the demand.”