Will Chinese quotas pinch?

To slow imports from China, the U.S. in May reimposed quotas on several categories of Chinese textiles, including cotton knit shirts and blouses, cotton trousers, underwear, manmade-fiber trousers, and combed-cotton yarn.

The quotas, which had been lifted in January as part of a World Trade Organization (WTO) mandate, limit imports within these categories to a 7.5% increase from the amount imported last year. Considering that imports from China to the U.S. have been surging, with growth in some apparel categories increasing as much as 1,500%, dropping imports to a 7.5% increase could disrupt the apparel supply.

But although many U.S. apparel marketers depend on China for a large part of their merchandise, most contacted aren’t panicking. Because of the volatility inherent in sourcing overseas, merchants have learned not to put their proverbial eggs in one basket and can shift some of their manufacturing and importing to other markets.

First, the back story

Hampstead, MD-based menswear cataloger/retailer Jos. A. Bank Clothiers grew concerned over potential problems with Chinese imports four years ago, recalls Frank Barbarino, when China joined the WTO.

At that time, the WTO added the right to impose safeguards or temporary quotas on China as a concession for the country’s not having to wait a full 10 years from the time it joined to have all quotas eliminated. The original members of the WTO, which was founded in 1995, had to wait 10 years before their quotas were eliminated, since the organization had agreed to phase out all member quotas by Jan. 1, 2005.

In the months since the quotas were eliminated, however, the U.S. government felt that the surge in shipments from China was damaging the domestic economy. The Committee for the Implementation of Textile Agreements (CITA), an inter-agency panel chaired by the U.S. Commerce Department, decided to impose the May safeguards to cap Chinese import growth and allow an adjustment period for U.S. producers.

According to the National Council of Textile Organizations (NCTO), such safeguards are used only in extreme situations when a surge of imports causes market disruption or there is ample evidence that a threat exists for market disruption to domestic producers.

“There is no WTO safeguard mechanism in place for other larger importers such as India, Pakistan, and Bangladesh,” says NCTO vice president Mike Hubbard. “Many European countries also currently impose safeguards on China, all of which are applied on a case-by-case basis for selected products. There are no across-the-board quotas.”

Diversity in sourcing

Without question, China is the biggest supplier of apparel to U.S. merchants, but it’s hardly the only one. “We believe in diverse sourcing here,” says Kris Marubio, spokesperson for the San Francisco-based apparel retailer Gap. “Since we don’t produce our own clothing for all three of our brands — Gap, Banana Republic, and Old Navy — we rely on 700 vendors in 50 countries.” Though 17% of Gap’s merchandise comes from China, the company also imports from suppliers in India, Sri Lanka, Bangladesh, and Vietnam, to name just a few.

China has been Plano, TX-based general merchant J.C. Penney’s number-one overseas supplier in the past, says spokesperson Tim Lyons, but the catalog/retail giant has been cultivating new vendors outside of China that can ship goods back to the U.S. in a timely, cost-effective manner. “Our sourcing team began planning in early 2004 to establish new suppliers in other parts of Asia — Vietnam, Bangladesh, India, Pakistan, and Sri Lanka,” says Lyons.

Although Chinese imports account for 25% of women’s apparel cataloger Boston Proper’s business, “we are not overly concerned about being able to get goods or worried by the overall cost of goods,” says chief financial officer Ken Fischer. For 10 years the Boca Raton, FL-based merchant has worked with an overseas agent who deals with individual factories, and Fischer says the agent doesn’t believe that the situation in China warrants panic.

According to its agent, none of the Boston Proper shipments have been subject to quota so far. But if problems occur, Fischer says, the agent, who works exclusively in the Far East, has a backup plan. The agent has working relationships with factories in Hong Kong and Macau — which are exempt from the quotas — that could serve as substitutes if the safeguards were to interfere with any of Boston Proper’s on-time shipments.

For his part, Jos. A. Bank’s Barbarino is pleased with his company’s foresight. “We have been watching the worldwide reaction to the quotas for the last four years — limiting any shortfall in production that could harm our supply chain,” Barbarino says. He adds that while there are no guarantees, the quota categories “currently being attacked by the U.S.” do not affect Jos. A. Bank.

“We didn’t want to let cost be the primary driver in determining whether or not our goods would get into our stores on time,” Barbarino says. “So we basically limited China as a possibility.” It moved much of its sourcing to India and established large manufacturing bases in the Caribbean Basin (Mexico, Central America, and the West Indies) and Thailand.

The price is not always right

For many merchants, however, China’s chief advantage as a source for apparel isn’t that it offers the lowest-priced goods. Rather, says Penney’s Lyons, the country’s highly developed infrastructure is what makes it an invaluable source.

“A large part of our apparel business is funneled through China, and they are exceptional at moving goods through the pipeline, getting materials shipped out on time and on budget,” he explains. “Even their ports and roads are more efficient and more modern than those of many other Asian countries.”

In fact, Penney has found that certain countries can produce goods more cheaply than China can. “Women’s apparel is our largest division, and India, Pakistan, and Bangladesh can produce the same goods for less,” Lyons says. Of course, importing is not about chasing the lowest price. “While we certainly want to save money, we don’t want to simply bring in the cheapest thing we can get,” he adds.

The U.S. safeguards don’t prevent China from shipping materials to other Asian countries, having the clothes made there, and then exporting them to the U.S. This works around existing safeguards and is perfectly legal. China already has such an arrangement with many countries in Southeast Asia, including Thailand and Malaysia, says Eric Autor, vice president/international trade counsel for the National Retail Federation (NRF). China has already begun sending materials to intermediaries in the countries mentioned and will likely continue to do so.

“The factory floor of the world”

But as a powerful supplier of clothing, toys, furniture, and dozens of other consumer products, China is what Autor calls “the factory floor of the world.” For that reason, all U.S. merchants dependent on China for goods should pay close attention to developments.

Even though the U.S.’s right to impose safeguards on China does not extend beyond 2008, that may change when the time comes. Once the floodgates are reopened, if Chinese import growth in certain categories again exceeds 1,000%, some believe it’s unlikely that the U.S. will simply sit back and watch. U.S.-China trade has become a politically sensitive issue, with the U.S. accruing a deficit of $162 billion last year alone — the largest imbalance ever with a single country. Already, segments of the U.S. textile and apparel industry, such as the American Manufacturing Trade Action Coalition (AMTAC), are calling for more trade barriers with China. What’s more, there has been a recent reapplication for a quota on more apparel categories, including knit fabrics, brassieres, and nightclothes.

But while quotas may slow China’s imports, they won’t stop them. “I expect that China will continue to be the major exporter to the U.S. market and will gain market share,” says Autor.

And even if it doesn’t, there are other countries just as eager to supply the U.S. with massive quantities of relatively inexpensive goods. In India, for example, the wage rate is even lower than in China. If it can figure out a way to upgrade its roads, ports, and overall rate of efficiency, Autor says, India could become an even greater threat than China.

Clothing categories in check

The following categories of apparel items imported from China have had a temporary quota or safeguard limiting the amount imported to a 7.5% rise over the previous year:

  • combed cotton yarn
  • cotton trousers
  • cotton and manmade-fiber underwear
  • cotton knit shirts and blouses
  • manmade-fiber knit shirts and blouses
  • manmade-fiber trousers
  • men’s and boy’s cotton and manmade-fiber shirts
  • woven shirts

Source: U.S. Department of Commerce

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