Importers Wary of Safeguard Embargo Impact on '06

U.S. importers are casting a wary eye on how this year's safeguard embargoes could affect their ability to import from China in 2006, especially during the first quarter.

Answers to some of their biggest questions could come from the next round of U.S.-China textile/apparel trade talks, which may start at the end of this month. Plans for the talks had not been finalized as of press time.

The pending negotiations could come as some importers try to solidify their spring 2006 sourcing plans, and as the U.S. government faces a self-imposed Oct. 1 deadline to determine whether to impose safeguards on Chinese imports in four more categories.

How many goods are stuck?

This is the $64,000 question for which there is no ready answer.

No one knows how many Chinese goods are stuck in limbo because they could not enter the United States once safeguard quotas filled in some major categories this summer. There is some consensus, however, that when it comes to embargoed Chinese apparel, the United States does not face a problem as severe as the situation in the European Union, where many containers of blocked Chinese apparel shipments piled up at ports.

"By and large, the U.S. apparel industry was more prepared and had more of a plan than our European counterparts," said Bob McKee, fashion industry solutions director for Intentia, an ERP technology vendor. "There wasn't this huge flight to procure everything from China . There was a fair amount of caution because of the possibility of safeguards' being imposed."

Chinese manufacturers likely are storing some 2005 orders for their U.S. clients, ready to ship them in 2006 as soon as the United States allows their entry. Some U.S. importers, realizing they were not going to make the cut at U.S. Customs before safeguard quotas filled, have put their shipments into U.S. bonded warehouse storage -- choosing to avoid presentation of the goods to U.S. Customs and duty payment on them.

Other U.S. importers tried to get their Chinese goods through customs, and had the goods returned to them by U.S. Customs for bonded warehouse storage because quotas were full. U.S. Customs and Border Protection told Apparel it is not tracking information about how many shipments it has turned away.

Norman Gelber, president of Customs & Trade Services, a Miami-based customs brokerage, said he doubts U.S. Customs has turned away many Chinese goods because the largest U.S. importers anticipated China safeguards and adjusted their plans accordingly.

He said he has not heard of any apparel containers backing up at the major U.S. ports. "Nobody in the U.S. wants to incur fees of goods sitting in port," he said.

Brenda Jacobs, attorney for the U.S. Association of Importers of Textiles and Apparel (USA-ITA), said it was impossible to know the quantity of shipments that were affected by safeguards because many importers likely chose to store their goods rather than present them to customs. She also said she believed it was primarily smaller importers that were impacted by safeguard embargoes.

What could happen in 2006?

Apparel firms are wondering how the volume of goods that were prevented from being shipped into the United States this year because of safeguards will affect the number of goods allowed to enter in 2006 -- and the speed at which key categories will fill next year.

"It depends upon whether there is an agreement reached," said Jacobs, who is with the Washington, DC-based law firm of Sidley Austin Brown & Wood LLP.

Here are a couple of different scenarios that could play out:

Scenario #1: U.S. and China Sign Bilateral Agreement. If the United States and China reach an agreement this year for a comprehensive textile/apparel trade deal, it is likely that the pact will set new annual quota levels for many of the safeguarded categories. The United States would allow Chinese goods in categories covered by the agreement to resume entry on Jan. 1, and to continue being imported until the quotas have filled. In this case, importers caught by safeguards this year could start entering their goods from bonded warehouse storage in January. This entry of 2005 shipments would count against the 2006 quota level.

As such, depending on how many 2005 goods are "stuck" and how many new orders U.S. importers are scheduling to ship in 2006, it is possible the new quotas might fill quickly in the first few months of next year. "They will have to watch very carefully and have contingency plans," Jacobs said.

Scenario #2: Delayed-and-Staged Entry. If there is no comprehensive agreement, the rules of the safeguard system will continue to apply for entry of Chinese goods in protected categories. In this case, importers holding 2005 Chinese shipments in bonded warehouse storage must wait until Feb. 1 to enter the apparel. Starting Feb. 1, the U.S. government will allow these shipments to enter -- in stages -- until all of the goods have been imported.

In the first stage, 5 percent of the base limit will be allowed entry for a one-month period. Then an additional 5 percent will be allowed entry monthly until all 2005 "overshipments" are allowed into the United States.

This 2006 entry of 2005 shipments (for categories for which safeguard quotas expired in December) would not be subject to any new safeguard quotas that might be imposed next year. For a hypothetical example, if a new safeguard was imposed on cotton trousers in February, it would not restrict importation next year of 2005 cotton trouser overshipments held up this year because of the embargo.

" Think about what happened last year with bras," said Jacobs. "The [safeguard] quota expired at the end of last year. There were lots of goods held up because they were overshipped, and they got staged in. By March, they were all in. They weren't charged against any limits, because there was no limit to charge against."

KATHLEEN DESMARTEAU is editor in chief of Apparel. STACI KUSTERBECK is a free-lance writer based in Long Island , NY , who frequently covers business topics for trade and consumer magazines.