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China Restrained but Undaunted

Despite political threats and fresh quotas, China is poised to strengthen its lead as the top U.S. supplier of textiles and apparel.

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Travis said for companies manufacturing with man-made fiber, where duty rates can be high, producing in countries or regions with free trade or preferential agreements that qualify for duty-free shipments is beneficial.

The Central American Free Trade Agreement, which has passed Congress and was signed by President Bush, but has yet to be implemented, could benefit from restrictions on China. U.S. Trade Representative Rob Portman last week said he hopes El Salvador and Nicaragua will be ready to put the pact into effect on March 1, and Guatemala, Costa Rica, Honduras and the Dominican Republic are working on it.

Other countries might become more attractive places to do business, given the uncertainty surrounding China's policies managing its currency, the yuan.

U.S. textile firms and many lawmakers believe the yuan is undervalued by as much as 40 percent, giving the country's goods significant pricing power on the international market.

Last year, Sens. Charles Schumer (D., N.Y.) and Lindsey Graham (R., S.C.) introduced a bill that would impose a 27.5 percent tariff on all imports from China if that nation does not revalue its currency.

Despite plenty of tough talk directed at China and its currency policies, Treasury Secretary John Snow has so far refrained from declaring the country a currency manipulator, a distinction that could ultimately lead to World Trade Organization action. He did say in November, however, that steps taken by the Chinese government to let the value of yuan fluctuate mildly were insufficient.

"The actual operation of the new system is highly constricted," said Snow. "As a result, the distortions and risks created by China's rigid exchange rate still persist....It is imperative that China move toward greater flexibility as quickly as possible."

The question of currency reform in China and what the U.S. will ultimately do about it looms large for some importers.

"I just think one day that we're playing tough guy with China, we're threatening them with all these sanctions and the next day we're backing off," said Steven Feinstein, president of New York-based M.M.&R. Inc., which markets the ECI brand. "One day we're threatening that if they don't loosen up on their currency restrictions that we're going to do this, and then the next day it's not an issue anymore. It's just very hard to gauge what's going on."

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