Us Apparel Trade Policy And The Impact On Sourcing

“Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular”

Thomas Babbington McCauley

“ Nations are made great, not by how much they consume, but by how much they produce. Manufacturing, not trade, is the main source of prosperity in America . It is worth protecting”

Jock Nash

Vietnam Letter

Letter to Senators Lindsay Graham and Elizabeth Dole from USTR Susan Schwab and Commerce Secretary Carlos Gutierrez, September 28, 2006

Persuaded the two Senators to lift their “hold” on legislation giving PNTR to Vietnam

Promises

To conclude a review “every six months as to whether there is sufficient evidence to initiate an antidumping investigation of any textile or apparel goods from Vietnam”

Notes “special sensitivity” of imports of trousers, shirts, underwear, swimwear and sweaters

Chilling Effect

Vietnam instituted export licensing program

Some retailers say they are redirecting sourcing to other countries

No indication which country to use as a “surrogate” for NME Vietnam

Next six-month review in September

Commerce Secretary Gituerrez recently hinted that US might limit scope of review

Socks Mischief

Another letter, from Secretary Giturerrez and former USTR Robert Portman to Alabama Representative Robert Aderholt, July 29, 2005

Promised either to seek a 10-year phase out of duties on CAFTA originating socks or to seek a safeguard

In exchange, Representative Aderholt voted for CAFTA

Inaction Incites Anger

The USTR tried to get a change in its pocketing letters; but none of the Central American countries would budge on socks

This understandably angered Representative Aderholt, who demanded that the administration do something about socks

His target: Honduras

Why wouldn’t the administration hold up its part of the bargain?

The Fine Print

To impose a CAFTA safeguard, the US must find that a textile article “is being imported into the United States in such increased quantities, in absolute terms or relative to the domestic market for that article, and under such conditions as to cause serious damage, or actual threat thereof, to a domestic industry producing an article that is like, or directly competitive with, the imported article”

Socks Math

Increases from Honduras aren’t nearly as big as Pakistan’s

A large part of the increase is from socks sewn in the US and subjected to mere toe closing in Honduras

Thus, the safeguard would hurt the very US domestic industry that Representative Aderholt seeks to protect

Shoot First

Secretary Gituerrez reiterated the old promise in a letter to Alabama Senator Jeff Sessions, June 28, 2007, seeking votes to extend ATPDEA

On August 21, 2007, CITA published its safeguard notice, seeking public comment

This triggers a 30-60-60-30 day process (comments-decision-consultations-imposition of safeguard)

Concessions? Tariff action?

What Next After Socks?

If CITA goes through with this safeguard on the basis of nonpersuasive numbers, other safeguards may follow

Men’s tailored clothing, children’s wear, and men’s and women’s trousers are possible targets, as are other CAFTA countries beyond Honduras

Wrong message to CAFTA countries

CAFTA Short Supply

First: File application with CITA

Second: After the application is filed and accepted, opponents only have 10 business days to respond with an “offer”

Third: The applicant gets only 4 business days to file a rebuttal

Fourth: Each must submit data about the availability of the yarn or fabric

Fifth: Designation by CITA

If no one objects, the request is approved

The whole process is finished in 30 business days (or 44 if CITA requires extensions)

Big Differences

No Federal Register notice

Short response period

Only offers – no comments

No CITA or ITC study

If no one objects, its approved

Unilateral designation

Opponents can seek revocation

Short Supply Definition

A short supply fiber, yarn, or fabric is a fiber, yarn, or fabric that is not available in commercial quantities in a timely manner from a producer in the territory of any Party in the CAFTA-DR region (only yarn and fabric are considered for apparel articles)

The Catch: Due Diligence

Due diligence is necessary because CITA does not independently study the request

Applicant must therefore perform due diligence and represent that the fabric or yarn is in short supply

Time consuming and expensive process that makes the process not so fast as it appears

CITA has called a meeting on September 19 about how to manage due diligence

Door Closes on DR Short Supply

Dominican Republic filed a request for 29 short supply fabrics this summer

This could have made up for the relatively stingy pocketing letter that the DR has managed so far

But 27 of the 29 fabrics were denied on August 15 due to objections raised by two Guatemalan fabric companies

Pocketing Letters

All the letters are done; except Dominican Republic might still be changed (see the 3 for 1 rule)

The President has proclamation authority to put them in effect, but consultation and layover (60 days) is necessary for the Dominican Republic and Costa Rica parts

All of the Central American parties have to adopt them by legislation

The pocketing terms can be done before Costa Rica ratifies CAFTA

The US hoped a comprehensive pocketing agreement would be signed July 27, but it didn’t get done

US Reconsiders 3 for 1

Coincidentally with the failed DR short supply effort, the US evidently is reconsidering a DR 3 for 1 proposal

This would allow an exception under the pocketing letter, which will otherwise require that all pocketing must be yarn forward

For selected cotton garments, DR could use one SME of foreign fabric for every 3 SME of US fabric

US domestic mills say this could outweigh the benefit (to them) of the pocketing rule, which otherwise requires that pockets must meet the yarn forward rule

Nicaragua TPL

On July 24, 2007, CITA reduced the 2007 Nicaragua TPL from 100 million SME to 97,584,339 SME

This happened because of a “shortfall” in Nicaragua’s pocketing letter agreement under which Nicaragua must use 1 SME of US fabric for every 1 SME of foreign fabrics in production of cotton and MMF garments, up to a limit of 20, 30, 40, and 50 SME in the first through fourth year of the agreement

Cumulation

No word yet on how big an increase will be negotiated to allow for Dominican Republic

Also no word on whether or how the Central American states will allocate cumulation, and whether cumulation will require a certificate of eligibility

Cumulation may go into effect before Costa Rica approves CAFTA

Changes to Mexico’s FTAs with CAFTA countries have been negotiated by all of the CAFTA countries except DR and Costa Rica; but all will require approval by their legislatures

DR gets five years to make an FTA with Mexico; Costa Rica might wait to change its FTA until after it approves CAFTA

CAFTA and Costa Rica

Still hasn’t ratified CAFTA

Special Elections Tribunal (TSE) has scheduled a referendum for October 7; 40 percent of the voters are required to participate for the vote to be binding

Supreme Court Constitutional Chamber has decided that CAFTA is constitutional on civil liberties and human rights grounds

Several Costa Rican laws must be changed, including a law dismantling the government monopoly on telecommunications

Costa Rica’s Incentive

The deadline to join CAFTA is March 1, 2008, two years after the first country (El Salvador) made CAFTA effective with the United States

Costa Rican supporters of CAFTA predict ratification can happen in time to make CAFTA effective by January 1, 2008

Peru and Colombia TPAs

The Peru TPA, already approved by Peru, could get approved in the U.S. Congress in September

The chances for the Colombia TPA, which has not passed either country’s legislature, are not good this year; labor violence and the actions of paramilitaries have cooled US legislators’ interest in the TPA

Pessimistic view is that Colombia might not be considered until after the 2008 elections

Presently, the USTR wants to approve pending FTAs and TPAs in order: Peru, Colombia, Panama, Korea

ATPDEA Extension

At the end of the last Congress, the House and Senate passed and the president signed legislation extending ATPDEA until June 30, 2007, with an automatic six month renewal for any country if its legislature and the United States Congress approved a TPA by then

TPAs weren’t approved in time

At the last minute, on June 30, 2007, Congress passed and the president signed an extension to February 29, 2008

Will it be enough time for the TPAs?

HOPE

Haitian Hemispheric Opportunity through Partnership Encouragement Act of 2006 (HOPE) is the long-awaited “relief” for Haiti

It affords duty free treatment to apparel articles wholly assembled or knit to shape in Haiti from any combination of fabric, components, or yarns, subject to a value content requirement and an annual limit

Hope Conditions

The cost or value of materials produced in Haiti or certain designated countries, plus the direct costs of processing operations performed in Haiti or such countries must equal 50 percent of the customs value of the article (55 percent in the fourth year and 60 percent in the fifth)

The designated countries are the United States, countries in FTAs with the United States, and CBI, AGOA, and Andean countries

The limit is 1 percent of US apparel imports in the first year, increasing in stages to 2 percent in the fifth year

More Hope Conditions

The value content requirement can be met with each entry or on an annual aggregate basis for the producer or entity controlling production

The value of all foreign materials must be subtracted before computing the value content; but there is a short supply feature

Woven apparel not meeting the value content requirement are still duty free up to limits of 50 million SME in the first and second year and 35 million SME in the third

Brassieres qualify, subject to the annual limit, if they are cut and assembled in the United States or Haiti, regardless of the source of the components

HOPE Problems

No one has made any claims, because Haiti has not yet adopted the complex visa system mandated by CBP, also without apparent authority, requiring 7 different visa forms when only 3 should be necessary

KORUS FTA Highlights

Apparel is generally subject to yarn forward tariff shift

Only 7 percent de minimis, rather than 10, with the expected exception for elastomeric yarns

No sewing thread, narrow elastic, or pocketing rules, like those of CAFTA

Some apparel articles (such as MMF socks and cotton t-shirts) remain dutiable for five years

Odd KORUS FTA Short Supply

No pre-negotiated list; all must be requested

A Party (country) need only contend that the material is in short supply in its territory, not the other Party’s territory

All short supply imports are subject to an annual limit of 100 million SME (Anti-transshipping? Anti-China?)

The program expires in 5 years unless the Parties otherwise agree

The CAFTA elastomeric error is not repeated

Also includes a NAFTA-style short supply provision

The “Trade Template”

In May, the administration, USTR, and Democratic party leaders reached an agreement in principal on trade policy

The deal is seen as necessary to get the Peru and Panama FTAs back on track

Some Trade Template Terms

Incorporate the ILO 1998 declarations on worker rights, rather than the stricter ILO core principals; and allow only Parties (countries) to seek enforcement, rather than unions and private parties

Enforcement of 7 multilateral environmental agreements (MEAs), including CITES and the Montreal Protocol

Allow introduction of generic drugs in other Parties as promptly as in the US

No action against US restrictions on foreign ownership of port facilities for national security reasons

Will the Trade Template Work?

It could be enough to garner enough Democrats’ votes for Peru and Panama

Can it be done with side letters or annexes?

Colombia remains a problem – might the template demands undo the deal and push Colombia toward Chavez’ influence?

Will it last in a Democratic administration, or will it be made tougher?

US Presidential Politics and Trade

McCain voted for CAFTA, NAFTA and all other FTAs; he’s seen as a free trade advocate

Fred Thompson says protectionist trade policies are “defensive, defeatist policies that have consistently been proven wrong . . . They are not what America is all about;” he wasn’t in Senate for CAFTA

Mitt Romney, a free trade advocate, said protectionism “would virtually guarantee that America would become a second-tier economy in a couple of decades, with a second-class standard of living”

Giuliani says action to reduce US trade deficit is “self defeating” and an “agenda of the past;” but otherwise has not spoken on trade

Each candidate has been less critical of China than the Democratic candidates, although Giuliani as not spoken on the issue

US Presidential Politics and Trade

Hillary Clinton has spoken for free trade, voting for the Australia, Chile, Singapore, and Oman FTAs; but she voted against CAFTA and TPA, and says the KORUS FTA is “inherently unfair” to the auto industry

Barak Obama has spoken generally in favor of free trade; but he opposed CAFTA on labor and environmental grounds, and has not yet taken a position on KORUS FTA

John Edwards is most critical of free trade; he voted against CAFTA and Chile FTA, and has spoken against NAFTA and KORUS US

Clinton and Obama have been critical of China’s currency policy; Edwards has not spoken on the issue

Next Elections

Iraq, immigration, economy, and social issues (gay marriage, abortion, etc.) are likely to be of more importance than trade

But in some areas, trade may matter

Present Senate: 49 Republicans and 49 Democrats, plus 2 independents who caucus with the Democrats

Of 33 seats up for election, 21 are held by Republicans and 12 by Democrats

A 34 th seat, Wyoming, will be the subject of a special election following the death in June of Senator Craig Thomas and his replacement by John Barrasso

Senate candidates up for election in the textile south include Republicans Lindsay Graham (SC), Jeff Sessions (AL), Saxby Chambliss (GA), and Elizabeth Dole (NC), and Democrat Mary Landrieu (LA)

All are rated “safe,” except Dole, rated “likely,” and Landrieu, rated “lean,” by the Cook Report

Trade Strategy

Republicans historically favor free trade

Southern Republicans are compromised, though, by textile interests, with some exceptions ( e.g., DeMint, Graham, Myrick)

Democrats include fewer and fewer trade advocates – in the 217-215 House CAFTA vote, only 15 Democrats voted for CAFTA, and there were more Republicans in the House then

Some freshman Democrats in both houses oppose FTAs

“ It’s not a good step forward. It’s good lip service”

Sen. Sherrod Brown (D-OH) (on the Trade Template)

“ Don't ask me to vote for a trade bill that will outsource one more manufacturing job . . . You have a lot of anger, and you have a lot of anxiety for the manufacturing employees who are still here. They feel they've gotten shafted by the whole process of trade. And they're looking for Democrats to come up with a different plan than we've had before”

Rep. Phil Hare (D-IL)

CAFTA Prospects

Pocketing letters: certain

Cumulation: likely

Limited future FTAs: likely

Costa Rica ratification: likely

Coast is clear for CAFTA opportunity!

Other Near Term Prospects

Iraq, immigration, appropriations, and presidential election are huge distractions

Peru: likely

Korea: maybe

Colombia: unlikely

TPA: nil

Doha: nil

More Trade Assumptions/Observations

New challenges to the US from well educated workers in low wage venues – like China and India

Fastest growing trade, and highest duties, are between developing countries

Easy international capital flows make US vulnerable to reaction to its policies ( e.g., IPOs and deals shifting from New York to London in wake of Sarbanes-Oxley)

World Bank says China will account for 50 percent of worldwide apparel production by 2009

“ Most fundamentally, as best said by President Clinton while advocating NAFTA, trade liberalization is the best path forward, but it needs to be inextricably combined with a parallel agenda of domestic programs—such as world-class public education, retraining, basic research, health care, and much else—to help those who are hurt by trade and to promote competitiveness in the global economy. Clinton also said that too often those who support trade oppose the domestic agenda, and those who support the domestic agenda oppose trade, and that the right answer is to combine the two. Bringing those two conflicting groups together, however, makes for difficult politics”