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Importers Scramble to Avoid Safeguard Limits

U.S. importers have rushed to beat embargoes on Chinese goods by moving up production, taking to air freight and filling bonded warehouses.

WASHINGTON — Faced with new restrictions on Chinese imports, vendors and retailers rushed to get goods into the U.S. in the last 60 days — moving up production timetables, chartering planes to beat slow-moving boats and readying warehouse space.

The first leg of the race is almost over. Four of the seven categories under safeguard quotas since May already have filled up, barring any more of those goods, such as cotton trousers, from entering the U.S. Two other categories are likely to be cut off soon and other safeguard petitions are pending. (See charts, this page.)

Goods now under safeguards, which are restricted to 7.5 percent annual growth, represented $1.31 billion in imports last year.

"The caps filled quickly, and a little more quickly than anticipated, and some people, including Jockey, had some goods caught in embargo," said Mark Jaeger, senior vice president and general counsel at Jockey International, the underwear maker based in Kenosha, Wis.

Jaeger said the embargoed goods were put into a bonded warehouse and would be replaced by imports from other countries, such as Thailand. Goods put in bonded warehouses controlled by the U.S. Customs Service are not counted against quotas, but may be off-loaded from ships, trucks or planes.

That a company such as Jockey, which has a diversified sourcing strategy and is an experienced importer, had some goods shipped by air and others embargoed demonstrates how quickly and unpredictably the quotas filled.

"There's a cloud right now over Chinese production," Jaeger said.

Scores of other companies turned to the skies to get their goods in on time.

"We ended up having to air freight a ton of goods," said Michael Delaney, chief executive officer of Ralsey, a division of sourcing giant Li & Fung.

Ralsey specializes in fine-gauge knit sweaters, which are included under safeguard in the knit shirt classification.

"The immediate effect was a significant cost increase to air freight merchandise," he said.

That cost, which the company absorbed, ranged from 60 cents to $1.50 per item.

Expressing a widely held view among importers, Delaney said he would like to see a more cooperative and less confrontational stance toward China from the U.S.

"They're going to be net importers of everything sooner or later," he said. "We should be figuring out how to sell them stuff, not close them off."

As much as importers see restrictions on China as a hindrance, the domestic textile industry views them as a matter of survival and has vowed to keep petitioning the Bush administration for new safeguards. Domestic trade groups have requested safeguards on another $944 million in imports, which the government is reviewing.

"This has really thrown a monkey wrench in the gears for a lot of these companies that thought they had gone over the final hurdle to no quotas," said Kevin Burke, president and ceo of the American Apparel & Footwear Association.

For instance, back-to-school goods that got stuck in embargo and are set to be released early next year will likely be held until fall 2006 when they will be seasonally appropriate or liquidated through the off-price channel.

"Somebody's going to have to pay for that mess," Burke said.

And that means manufacturers are living with lower profit margins to maintain good relationships with their retail customers, he said. Retailers that do their own importing or are compelled to accept higher prices from their vendors will have trouble passing on the costs to customers.

"There's very little price elasticity in the retail industry because of the competition," said Tracy Mullin, ceo of the National Retail Federation.

In almost every regard, large, well-financed firms are better positioned to weather the risks of safeguards than smaller companies. Tying up credit lines with goods either shipped earlier than usual or caught in embargo may lessen a company's ability to flow more goods though the system smoothly.

"If the goods wind up sitting in a warehouse someplace, it's going to compromise credit," said Andrew Jassin, managing director of the consulting firm Jassin-O'Rourke Group.

There is hope that the Bush administration will cut a comprehensive deal similar to one the European Union and China reached in June, which would bring more predictability and flexibility to sourcing plans. The EU agreement allows for 8 to 12.5 percent growth on 10 categories of goods through 2007 — ending a year earlier than the safeguard provision China assented to when it joined the World Trade Organization and allowing more growth than the 7.5 percent safeguard cap.

However, after meetings this month, U.S. and Chinese negotiators reported no progress beyond a desire to keep talking.

"If we can reach an agreement with China like the Europeans did, it would help us plan out our business for the next three years," said Joe McConnell vice president of strategic sourcing at Kellwood Co.

For now, importers are switching production to other countries, adjusting fabric contents to get around quotas and paying to warehouse goods that were brought into the country early. There also has been a return to outward processing arrangements, where the components of goods are made in China and put together in another region, such as Hong Kong or Macau, which are both special administrative regions of China and have their imports counted separately.

Pending Petitions

WASHINGTON — Once safeguard petitions are filed, the Committee for the Implementation of Textile Agreements has 15 working days to decide whether or not to consider the request. If accepted, CITA starts a public comment period that lasts 30 calendar days and is followed by a 60-day determination period, which can be extended if necessary.
This is where the outstanding safeguard petitions stand:

  • STYLE: Cotton and man-made fiber socks
    CITA determination by Friday.
  • STYLE: Knit fabric
    CITA determination by Saturday.
  • STYLE: Other synthetic filament fabric
    CITA determination by Sunday.
  • STYLE: Men's and boy's wool trousers
    CITA determination by Sunday.
  • STYLE: Cotton and man-made fiber swimwear
    CITA determination by Monday.
  • STYLE: Cotton and man-made fiber nightwear
    CITA determination by Monday.
  • STYLE: Cotton and man-made fiber skirts
    CITA determination by Monday.
  • STYLE: Women's and girls' cotton and man-made fiber woven shirts
    CITA determination by Monday.
  • STYLE: Dressing gowns and robes
    CITA determination by Aug. 2.
  • STYLE: Bras
    CITA determination by Aug. 2.
  • STYLE: Cotton and man-made fiber sweaters
    CITA determination by Aug. 2.

Source: Commerce Department

Quota Fills on Chinese Imports

  • STYLE: Cotton knit shirts and blouses
    ALLOWANCE: 4.7 million dozen
    DATE FILLED: July 5
  • STYLE: Cotton, man-made fiber underwear
    ALLOWANCE: 5.06 million dozen
    DATE FILLED: July 5
  • STYLE: Cotton trousers
    ALLOWANCE: 4.34 million dozen
    DATE FILLED: July 8
  • STYLE: Man-made knit shirts and blouses
    ALLOWANCE: 2.84 million dozen
    DATE FILLED: July 12
  • STYLE: Man-made fiber trousers
    ALLOWANCE: 2.66 million dozen
    PERCENT FILLED: 89.3
  • STYLE: Men's and boy's cotton and man-made fiber shirts
    ALLOWANCE: 2.21 million dozen
    PERCENT FILLED: 80.9
  • STYLE: Combed cotton yarn
    ALLOWANCE: 1.45 million kilograms
    PERCENT FILLED: 18.1
  • Quotas on cotton knit shirts, blouses and trousers, and cotton and man-made fiber underwear went into effect on May 25. The other quotas were effective May 27. Percent filled as of July 22.

    Source: Commerce Department