Fashion Intel & Analysis

There are yet more instances in which apparel companies and retailers are being subjected to civil penalties for making and distributing children’s upper body garments with drawstrings that pose a choking risk.  


            One company has agreed to pay a $100,000 penalty for selling sweatshirts with drawstrings from 2003 to 2008. The sweatshirts were recalled earlier this year.  In addition, one retailer agreed to pay a $425,000 settlement for failing to report the sale of children’s drawstring sweatshirts, and two others agreed to pay a total of $85,000 in civil penalties for selling children’s sweatshirts and jackets with drawstrings that do not comply with CPSC rules.

            The Committee for the Implementation of Textile Agreements (CITA) has concluded that certain woven modal-polyester apparel fabric is not available in commercial quantities in CAFTA-DR countries. This decision means goods made with such third country fabric can still qualify for trade preferences under CAFTA-DR.  The decision, in favor of BWA, applies to fabric under HTSUS subheadings 5516.12, 5516.13, 5516.22, and 5516.23.

The Government of Brazil earlier this week was told by a WTO arbitration panel that it has the right to retaliate against hundreds of millions of dollars worth of U.S. exports due to the inability of the U.S. implement an earlier WTO ruling against U.S. cotton subsidies. But this complex case, which appears likely to continue to evolve, appears unlikely to affect companies doing business in the U.S. or selling into the Brazilian market in the near future.


            The WTO panel said Brazil could retaliate against $294.7 million worth of U.S. imports, but this number is based on complicated calculation using 2006 data, and Brazil believes the retaliation level could go as high as $800 million when more recent data is used. However, an argument is beginning to form on the U.S. side that the WTO needs to reconsider U.S. compliance from 2008 onwards, since the U.S. replaced a key subsidy program last year that was seen as a violation of WTO rules. U.S. cotton producers are already saying the WTO decision needs to be “updated” to reflect that change.





Specifically, the Step 2 program that was found to violate WTO rules in 2005 paid U.S. textile mills for using U.S. cotton, and the payment was the difference between the U.S. and world price. The new system offers a much smaller payment to textile mills for using cotton, regardless of origin.


            The U.S. still has in place the GSM 102 program, which is an export credit guarantee program for cotton that was also seen as a violation of WTO rules. But even here, U.S. industry is arguing that the program has been changed to become a more market oriented program and now pays for itself, which means it cannot be offering a substantial subsidy.


            Taken together, these changes have already had a transformative effect on the U.S. cotton industry. As industry pointed out this week, U.S. cotton production has fallen substantially. Therefore, it is incorrect to expect that a sudden burst of U.S. compliance might have a dramatic effect on the industry, such as a sudden increase in prices as subsidies are stripped away. Rather, the U.S. appears to be on course to argue that an updated opinion on its current programs is needed.


            Further debate on whether and how Brazil retaliates is also expected, since Brazil has the right to retaliate against goods but can also cross-retaliate and deny IP rights to U.S. goods if the total retaliation level reaches a certain threshold.


            The U.S. textile industry is apparently telling reporters that it is considering filing its own Section 421 product specific safeguard cases against Chinese imports.  The assertions come as the Obama administration is increasingly expected to approve some form of remedy to the United Steelworkers (USW) in response to the petition that union filed under Section 421 against imports of Chinese tires.


            The White House is widely expected to offer relief to the USW on or before September 17, as the pressure to help a key labor constituency at a time of economic turmoil and slow, uncertain recovery – even though no U.S. tire producers have expressed support for relief and two small U.S. companies with U.S. production have expressly come out against relief. 


            But President Obama is likely to be wary of the need not to undermine the U.S. economic and security relationship with China, and thus is expected to seek a middle ground in providing relief. There are many compromise options available.  For example, the U.S. could impose a lower tariff than those recommended by the U.S. International Trade Commission, a quota or some combination; Or the Administration could seek commitments from China to reduce alleged export subsidies for tire makers; or increase worker assistance to USW members; or it could include elements of each of these and other ideas.


            Regardless of the remedy, any remedy decision by President Obama can be expected to be seen as a signal that the Section 421 door has finally been opened, after the Bush administration had kept it shut. In addition, any remedy provided in the tire case sends a signal that safeguards are possible even when only labor applies for them, since the tire case was brought by USW and has had no public support from any U.S. tire producers.


            Assuming that President Obama provides some form of relief in the tires case, over the next year other petitions are likely by similarly small, budget-challenged companies and industries.  As a general rule, Section 421 has been used by small producers, including single entities that



account for virtually all U.S. production, probably because relief may be obtained more inexpensively than through antidumping or countervailing duty petitions.  Of course, the relief

provided under Section 421 is also more fleeting, limited to a maximum of three years, while the antidumping and countervailing duty laws provide many years of relief – and uncertainty – for foreign producers and U.S. importers.  A company or industry with the financial wherewithal would almost certainly choose the more “permanent” relief provided by an antidumping and/or countervailing duty order. 


            As a result, it is not surprising that U.S. textile makers may see an opportunity to use Workers United to gain standing and file a Section 421 petition.  While the reported pronouncements by the U.S. industry may be saber-rattling, indications at this point are that the industry views the product specific safeguard as its most readily available and least costly option.  Given the lower standing requirements, in which there must be a petitioning industry or workers producing a like product but no threshold minimum amount of production represented by the petitioner, Section 421 is clearly an easier standard for the U.S. textile industry to meet compared to the standard applicable to antidumping or countervailing duty petitions.  (The petition still has to identify the percentage of U.S. production represented by the petitioners, though.)   While having petitioners who account for an infinitesimal portion of U.S. production may not result in an affirmative determination at the end of the day (especially if it turns out that the apparel factories in which they work do not support relief or do not produce for the commercial market), that may be a battle the industry views as worth fighting in the current political environment.


            Apparel importers and producers alike should be taking steps now to make sure they are prepared to act quickly in the event that an apparel 421 petition is filed – particularly because these cases move on a highly expedited schedule.  The entire investigation, from the filing of the petition to the date the President announces his decision on remedy, assuming that the USITC finds market disruption, is 150 days long.  As a result, once a petition is filed, the USITC can be expected to issue questionnaires to manufacturers, importers and purchasers within three days, with the questionnaire responses due just 14 days later.  Those questionnaires, which are very similar to the questionnaires used by the USITC in antidumping and countervailing duty cases (even though safeguard investigations do not involve allegations of unfair trade) would ask for data going back five years.  (Copies of the questionnaires issued in prior 421 investigations are available upon request.)  Generally, the time line for the USITC part of a 421 investigation is as follows:


Day 1                           Petition filed

Day 3                           Questionnaires issued

Day 17                         Questionnaire responses due

Day 35                         Deadline for filing requests to appear at public hearing

Day 37                         Deadline for filing pre-hearing briefs

Day 40                         Hearing is held

Day 45                         Deadline for filing post-hearing briefs

Day 56                         Commission votes on market disruption

Day 62                         Comments due on remedy

Day 76                         USITC Report to the President and USTR on remedy recommendation






            President Obama yesterday nominated Michael Punke as Deputy U.S. Trade Representative in Geneva, where he would manage the ongoing Doha round and take on a leading role in handling U.S. trade disputes at the World Trade Organization. Punke was a trade official under Clinton, serving as director of international economic affairs in the White House from 1993 to 1995, and then as a senior policy advisor at USTR.


            Punke also previously served as international trade counsel to Senator Max Baucus (D-MT), now the Senate Finance Committee Chairman, from 1991 to 1992. After leaving government in the 1990s, Punke worked at a Washington law firm and has worked at his own consulting firm in Montana for the last six years.