Industry Pursues New Trade Agenda

ollowing ratification of the Dominican Republic- Central American Free Trade Agreement
(DR-CAFTA), US textile and apparel manufacturers and importers are looking ahead for what they can
see with respect to trade with China and a worldwide round of trade liberalization negotiations
known as the Doha Round.

From the standpoint of US textile manufacturers and importers, the highly controversial
DR-CAFTA, which barely squeaked by Congress, holds out the promise of new market opportunities and
more long-range stability for those companies willing to make the necessary commitments to do more
business in this hemisphere.

No one expects DR-CAFTA to result in a new surge of trade opportunities, but rather an
evolution that will result in less dominance of international trade in textiles and apparel by
China and other Asian low-wage country suppliers. The DR-CAFTA countries have combined economies of
less than 2 percent of that of the United States and a standard of living well below the US poverty
level. As a result, they don’t present much of a market for US clothing, home furnishings or other
textile products. Where the market opportunities lie is in the US-made inputs in apparel that will
be made in the Central American countries and exported duty-free to the US market.

DR-CAFTA provides duty-free access to the US market for apparel made of US or regional yarn
and fabric. Pocketing and linings also must be of US origin.

Apparel with Mexican and Canadian inputs will be duty-free eventually under cumulation
provisions of the agreement. Before that can happen, Canada must pass legislation modifying its
participation in the North American Free Trade Agreement (NAFTA), and Mexico must enter into new
customs agreements with the United States to prevent illegal transshipments.

There is a special tariff preference level (TPL) with Nicaragua that initially will allow 100
million square meters of fabric or yarn from foreign sources in its cotton trousers, and that
eventually will be scaled down over a five-year term, after which Nicaragua must match its use of
foreign inputs with an equal amount of fabric and yarn made in the United States. Costa Rica has a
small TPL that permits use of 500,000 square meters of foreign wool inputs. The agreement also will
require participating countries to demonstrate they are enforcing their own labor laws and working
to improve them. Up to this point only three countries — El Salvador, Guatemala and Honduras — have
ratified the agreement. Until the other three ratify it, they cannot benefit from the special
duty-free treatment for their exports.

Since the Central American countries for the most part already had duty-free access to the
United States under the Caribbean Basin Trade Partnership Act (CBTPA), the new pact has two
important features: DR-CAFTA is permanent, while the previous CBTPA legislation was subject to
renewal and perhaps modification; and DR-CAFTA should result in more two-way trade. Members of the
National Retail Federation, Washington, and other importers say DR-CAFTA will give them more
choices for sourcing clothing, and Central American countries will have a definite time-to-market

chesnutt_Copy_2James W. Chesnutt, CEO, National Spinning Co., New York City, and
chairman, National Council of Textile Organizations (NCTO), Washington — a strong supporter of
DR-CAFTA as it worked its way through Congress — sees many opportunities for US textile
manufacturers in Central America. He believes there is a good amount of unused capacity in Central
America that can be put to work using US-made fabric and yarn. In order to benefit from the pact,
he believes, textile manufacturers should encourage their customers to look toward Central America
to produce their finished products, they should use whatever influence they have with retailers to
do the same, and they need to work with partners to develop full packages.

“We need to find out what they need and then provide the products, quality and service they
want in order to take advantage of the opportunities proximity to market presents,” he said.

Trade With China

Ever since Chinese apparel imports surged as much as 1,500 percent after quotas were removed
last January, the US government, at the behest of domestic textile manufacturers, has been using
the safeguard mechanism in China’s WTO accession agreement to impose new quotas. Some 20 safeguard
petitions covering a wide range of products have been approved or are pending. China is not very
happy about that, and neither are US importers of textiles and apparel, but domestic manufacturers
see safeguards as a way to stem the flood of imports. The trouble with safeguards — which if
approved will apply a 7.5-percent annual growth factor on imports for one year — is they will
expire at the end of this calendar year, and an attempt will have to be made to roll them over. In
addition, the safeguard opportunity expires in 2008.

As a result, US textile manufacturers have been pressing for a comprehensive quota agreement
to replace the piecemeal safeguards approach. US and Chinese trade officials held negotiations on a
comprehensive agreement, but differences remain. A spokesman for the US Trade Representative said, “
Both China and the United States are working towards a broad solution that provides greater
certainty for the textiles market.” That certainty is something US importers of textiles and
apparel would like to have, and textile manufacturers would like to have a cap on import growth.

Above and beyond any consideration of quotas, China’s manipulation of its currency remains a
major problem. China announced it would revalue its currency by 2 percent, but no one in the United
States feels it would make much of a difference with a currency that textile industry leaders say
amounts to a 40-percent subsidy for imports. A broad-based coalition of manufacturing, labor and
farm organizations has dubbed China’s action “woefully inadequate.” Members of Congress are holding
a club over China’s head with legislation that would impose a 27.5-percent duty on Chinese goods if
it does not revalue its exchange rate. The legislation’s chance of passage is slim, and President
Bush likely would veto it.

Other legislation of interest is a measure that would permit the United States to levy
countervailing duties on goods from non-market economies such as China. A goal of US textile
manufacturers, it could become a reality as Congress becomes more concerned about what it says is
illegally subsidized China trade.

What’s In The Doha Round For Textiles?

The Doha Round of trade liberalization negotiations is not too far over the horizon. World Trade
Organization (WTO) member nations have set the end of 2006 as the deadline to conclude an overhaul
of international trade by reducing tariffs and non-tariff barriers, cutting agriculture subsidies
and generally promoting free and fair trade. US Trade Representative Rob Portman met recently with
WTO officials in Geneva and following the sessions said: “The United States will continue to lead
in the Doha Round. … [W]e believe in it, we believe as prime advocates of reform across the board
that a successful Doha Round is extremely important not just for the United States but to the
global economy and particularly to the developing world. We continue to be very ambitious in what
we’d like to see Doha achieve in market access.”

The next important step is a ministerial meeting scheduled for next December in Hong Kong, at
which time it is hoped a formula for the formal discussions will emerge.

In connection with that formula, US textile manufacturers want “sectoral negotiations” where
textile trade will be considered separately from other manufacturing industries. They do not want
textiles to become a bargaining chit in deals with other commodities. The US government is
supporting that position.

In the formal negotiations, US manufacturers will be opposed to any tariff cuts until textile
and apparel tariffs in other countries are brought down to US levels. In addition, they will seek a
comprehensive, long-term safeguard mechanism that could remain in effect beyond the 2008 expiration
date of the Chinese safeguard agreement.

The very shape and future of the US textile industry will be at stake as these issues unfold
over the next few months.

September 2005