California Apparel News

Next year, American apparel and textile manufacturers will have a harder time importing as many goods from China as they did this year.

That’s because of a slight wrinkle in the World Trade Organization’s agreement that stipulates apparel and textile quotas will disappear when the clock strikes midnight on Dec. 31, 2004.

In China, the government dispenses quotas to various factories. Some are free. Some are traded between factories and brokers. When a factory’s apparel or textile export orders increase, the factory can often borrow up to 6 percent against the next year’s quotas to fill its immediate needs.

But with no quotas existing in 2005, there will be nothing to borrow against, creating a quota crunch in 2004.

“In 2004, it’s going to be kind of tight,” admitted Laura Jones, executive director of the U.S. Association of Importers of Textiles & Apparel in New York.

That means two things: Clothing will cost more next year as quotas become scarcer. And retail store shelves may have less clothing on them toward the end of 2004.

With that in mind, U.S. manufacturers undoubtedly will be turning to other countries with higher labor costs to fill their production orders.

“People like me who buy quotas on the spot market are definitely going to have a more difficult time,” said Lonnie Kane, president of Karen Kane Inc., a women’s contemporary manufacturer in Vernon, Calif., that has stepped up its overseas manufacturing in recent years.

Quotas, sold through a quota broker, can cost as much as garments. For example, a pair of blue jeans might cost about $4.50 to manufacture in China, but the quota could run $4 a pair. That quota price will undoubtedly inch up next year when factories have a harder time getting more quotas.

“Some people are going to be running short at the end of the year,” Kane said. “There may be less product out there for a few months. Or people might have to go elsewhere, like the Dominican Republic, to get things manufactured.”

Uncertain times

Starting in 2005, the roadblocks to abolishing quotas will come tumbling down despite the recent breakdown in the World Trade Organization (WTO) talks in Cancun, Mexico. Those talks had nothing to do with textiles and apparel quotas, which had been agreed upon in an earlier round of negotiations. The talks collapsed over agricultural subsidies.

However, delegates never discussed a reduction in apparel and textile tariffs, which means tariffs could stay at higher levels than originally anticipated.

Still, no one knows how the new free-trade system will affect the U.S. apparel and textile industries. That’s because the United States already imports most of its apparel from China and other overseas sources.

“Imports will increase, but nobody knows to what magnitude,” said Jim Leonard, the U.S. Department of Commerce’s deputy assistant secretary of textiles, apparel and consumer goods, who is currently traveling through Alabama and Georgia to hear textile factories’ concerns about the new world order.

Ed Redding, executive vice president of importing and sourcing at John Paul Richard Inc. in Calabasas, Calif., recently toured various clothing factories in China that make about 40 percent of the company’s line. He said everyone is unclear about which apparel categories will have an easier time making it into the United States and which ones will be challenged by protectionist safeguards to keep some apparel categories from flooding the country. “I honestly didn’t get any answers that were clear enough to plan your production around,” Redding said.

Dominant player

The big losers in the new free-trade world are countries that are secondary apparel and textile manufacturing markets with more expensive labor costs. Now, when importers use up their Chinese quotas, they often flock to Cambodia, Vietnam or Malaysia to fill their orders.

“China will make serious inroads in our industry,” said Charles Bremer, vice president of international trade for the American Textile Manufacturers Institute (ATMI) in Washington, D.C. “But more dramatic, in 2005, they are going to wipe out everybody else. India, China and Pakistan will survive. Yet you can kiss everyone else goodbye.”

ATMI has been lobbying government officials to install safeguards to protect U.S. businesses.

“China is the world’s largest country [in population],” Bremer said. “They have an unlimited supply of labor. With that you have low wages that will stay low. They have the world’s largest cotton crop and the largest man-made fiber industry. It is self-sufficient in all its raw materials. The only thing they lack is wool, and Australia is only too glad to sell it to them.”

Indeed, manufacturers are already considering where to place their orders in China, leaving behind their old factories in other parts of the world.

“We will be doing a lot more business in China in 2005 and 2006,” said Moshe Tsabag, president and owner of Los Angeles junior apparel company Hot Kiss Inc. “Currently, because of certain quota prices, we have no choice but to go to other countries such as Vietnam, Korea, Malaysia and India.”

Hot Kiss produces 50 percent of its goods overseas and the rest in the Los Angeles area. The company plans to keep that mix and may even increase its domestic production to 60 or 70 percent.

“2004 will give me even more reason to produce domestically,” said Tsabag, who prefers to manufacture locally to get a quick turnaround on his junior lines. “I like to have a hold on my product, see it, feel it and touch it. If something is wrong, we can fix it. When it’s on a boat or a plane, you are never sure when it’s going to arrive.”

Safety plug

As part of the agreement covering China’s entry into the WTO in December 2001, countries are allowed to impose safeguards on Chinese imports until the end of 2008.

Already, a broad coalition of textile and apparel manufacturers has filed petitions asking the U.S. government to restrict imports of bras, knit fabrics, and robes and dressing gowns.

Leonard of the U.S. Department of Commerce said the government is reviewing those requests and should have a decision in mid-November. For many, this is a test case to see how the government responds. “After quotas go away, there certainly will be more safeguard requests,” Leonard said.

In addition, the United States is working on a number of free-trade agreements with other regions. U.S. trade negotiators expect to have a new Central American Free Trade Agreement, which would drop quotas and duties on apparel using U.S. fibers or yarns, hammered out by the end of the year.

Some consider those kinds of trade agreements to be the only things that are saving the U.S. textile industry.

“If it weren’t for those agreements, we wouldn’t have an apparel fabric sector, ” said ATMI’s Bremer.