Customs Update: The 2005 Apparel Wars And Other Topical Issues

Friday, October 1, 2004 - 01:00

I. Quota Elimination - Year End Planning

As has been widely reported, remaining apparel quotas for World Trade
Organization (WTO) countries will expire at the end of 2004. Less widely
reported are some of the negative possibilities that may result.

General. The United States will not apply quota flexibility provisions found
in various bilateral agreements at the end of 2004. That is, countries will not
be able to increase tight quota levels by applying carryforward or carryback.
Such flexibility often provided a country with as much as six to eleven percent
additional quota in a particular category. Consequently, traditionally tight
quota categories may close earlier than normal and many more categories are
likely to embargo than in recent years.

The Committee for the Implementation of Textile Agreements (CITA) has always
taken the position that it has the authority to embargo goods permanently that
are shipped after a category closes. In the 1980's when embargos were more
frequent, CITA published a federal register notice to this effect each year, but
never exercised this permanent embargo power. However in some instances the
entry of embargoed goods was staged over a three-month period at the beginning
of the new calendar year. This policy could result in problems in 2005.

Under the various bilateral quota agreements currently in place, goods
exported in 2004 require a visa even if they arrive in 2005. CITA has recently
explained that this rule will continue in 2005. Accordingly, the failure to
present visas in 2005 might result in shipments being excluded or release

China. The big question as regards China for the remainder of 2004 is whether
additional safeguard quotas will be implemented. Initially, it was believed that
safeguard petitions could only be filed in 2004 against categories that had
already been integrated (phased-out), e.g., category 239-infants wear. Recently,
there has been pressure on the administration to accept petitions claiming
threat of injury as opposed to a higher standard of injury. If this position is
accepted, it could affect the timing of the filing of safeguard petitions.

While no additional safeguard petitions have been filed in 2004, last year
four petitions were filed in July. The timing of such petitions was not
coincidental; rather the petitions were filed in July with the expectation that,
if accepted, quotas would be implemented during the last quarter of 2003.
Safeguard quotas implemented in the last quarter of a calendar year are
effective for 12 months. Safeguard quotas with an effective date prior to
October 1, only run to the end of that same calendar year. Accordingly,
importers dealing in integrated category goods should carefully monitor
safeguard petition developments for the next several months.

As regards 2005, since all categories from WTO member countries will be
integrated, safeguard petitions can be filed against virtually any category. The
only real question that remains is the timing and scope of any such safeguard
petitions. As regards timing, the question is whether any such petitions will be
filed and seriously considered in advance of an anticipated import surge, i.e.,
the first quarter of 2005, or only after several months of import data in a
quota free environment is available. Once again, if petitions are not filed or
seriously considered for several months into 2005, technical considerations may
dictate that such petitions are not filed until mid-year, potentially resulting
in a six- to nine-month largely quota-free environment.

Based on the latest reports in trade periodicals it appears that this issue
will be a political football. The U.S. is sending representatives to China to
press for a four-year solution to replace absolute quota elimination, and the
Chinese Government is expected to deny this request. Thereafter it is
anticipated that safeguard petitions will be filed covering a number of textile
and apparel categories. It is likely that these petitions will result in the
imposition of quotas in 2005. China will complain to the WTO but this will not
be resolved before the safeguard quota program runs its four-year lifetime

The U.S. maintains that annual safeguard quotas can be renewed each year for
a total of four years of safeguard quotas. When safeguard quotas were imposed
last year on brassieres, robes, and knit fabric, China refused to administer the
quotas. This means that the U.S. monitors quota limits. If China refuses to
monitor the new safeguard quotas that will be imposed, then importers must
monitor the numbers to ensure that their goods are not embargoed. Shipments at
the end of the quota year will always be at risk.

Other Countries - Transshipment Enforcement And Audits. Senior U.S. Customs
officials have publicly stated that the unavailability of quota flexibility in
2004 will create an environment in which increased transshipment may occur. That
is, when a category from one country closes (with no hope for quota
flexibility), exporters may inappropriately utilize still open quotas from other

Thus, irrespective of whether this actually occurs, it can be expected that
Customs will continue to maintain heightened scrutiny of textile and apparel
imports through the balance of 2004. The prospect of such heightened scrutiny in
2005 will depend in large part on China safeguard quota developments.

Certain goods are eligible for duty free treatment under Free Trade
Agreements (i.e., NAFTA, AGOA, CBTPA). We understand that additional Customs
audits are planned to review the propriety of duty free claims under these

Antidumping Duties. Finally, we anticipate that certain domestic
manufacturers and trade associations will consider filing dumping complaints
with the U.S. Department of Commerce. These complaints will allege that certain
textile and apparel items are being sold in the U.S. at less than fair value,
and that these predatory prices are injuring domestic producers. These petitions
may result in dumping proceedings that may last for years.

In sum, foreign manufacturers and importers of textiles and apparel will face
a fair amount of disruption and uncertainty over the next few years. Preparation
for the imposition of quotas, Customs audits, and dumping cases should all be
considered to survive the attack on textiles that is expected to erupt.

II. U.S. Customs Goes To Brussels To Resolve U.S. Classification Disputes

In the past the interpretation of the U.S. Harmonized Tariff Schedules has
been a purely domestic affair. Importers would battle with local Import
Specialists, National Import Specialists, and Customs Headquarters (Office of
Rulings and Regulations). If they were unsuccessful, they would have recourse to
the Customs Courts.

Now importers should also be aware that classification decisions and
explanatory notes are being issued in Brussels by the Harmonized Systems
Committee ("HSC") and other Technical Committees of the World Customs
Organization ("WCO"). Once these decisions and notes are issued, U.S. Customs
will follow them, and it will add an additional barrier to achieving successful
decisions in the U.S. Courts.

The HSC has issued a new note concerning the classification of festive
articles that is at odds with the Court of Appeals' (CAFC's) decision on this
issue. We are awaiting a decision as to how the new note will impact this issue.

At the request of the U.S. delegates the HSC is also currently considering
the classification of certain handbags and luggage made from leather that had
been finished with a plastic coating. The HSC concluded that these articles were
leather, but the standards to be used for that conclusion have yet to be
published. Standards should be adopted at the October 2004 HSC meeting.

Finally, "outdoor footwear" with an outersole that has a constituent material
of textile is classifiable under HTS Heading 6405 which has favorable duty rates
in the U.S. (i.e., seven and a half percent or twelve and a half percent). U.S.
delegates have suggested that the textile components in the outersole should be
disregarded and that the shoes should be classified under HTS Heading 6404 at
higher rates. This issue will be discussed by the HSC in October 2004.

Product planning and properly costing products are large components in
creating a successful importing business. Mistakes can be devastating. Now the
answers to these issues may be found at the WCO and not only in the country
where the goods will be imported.

Global Planning. Because the U.S. is a signatory to international agreements
controlling the classification and valuation of imported goods, we have found
that the analyses that we conduct to minimize duties in the U.S. are largely
applicable to achieve similar duty savings in other import venues.

III. WTO Decisions

The World Trade Organization (WTO) has issued a number of decisions against
U.S. policies relating to: (1) U.S. tax benefits given to Foreign Sales
Corporations; and (2) distribution of dumping duties collected by the Government
to U.S. dumping petitioners. In each instance the WTO has held that these
policies unfairly support U.S. producers. The decisions clear the way for the
WTO complainants (e.g., EU, Canada, etc.) to assess punitive duties on U.S.
exports. Such duties will be based on the Harmonized Tariff classification which
is given to these goods on importation. Against this background, it may be
beneficial for U.S. producers to be proactive on classification and valuation
issues that may have long been ignored.

Robert B. Silverman is a Partner in Grunfeld,
Desiderio, Lebowitz, Silverman & Klestadt LLP, a law firm specializing in
Customs law and related trade matters. GDLSK is one of the largest law firms
specializing in this field. Mr. Silverman has been involved with Customs issues
for over 30 years, including four years as a trial attorney with the Department
of Justice (Customs Section). He can be reached at

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