“US Apparel Trade Policy

and the Impact on Sourcing”

August 28, 2007

Las VegasCopyright © 2007 Jonathan M. Fee All Rights Reserved

“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 34th 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”

Robert Rubin

Longer Range Prognostication

•A Democratic presidential administration and a Democratic Congress

•CAFTA may not be successful without further liberalization

•Peru, Colombia, Panama may happen; but not much activity after that

• Innovative yarn, fabric, and apparel companies continue to compete for a shrinking share of a world pie

Jonathan M. Fee

Alston & Bird LLP950 F Street, N.W.

Washington, D.C. 20004202 756 3387; fax 202 756 3333

jon.fee@alston.com