Download How to Assess the Ability of a Short

How to Assess the Ability of a Short-Supply Process to
Promote Trade and Investment in Apparel in the TPP
As negotiators consider various options to provide flexibility in the TPP from the U.S. proposal
for a rigid, trade-restrictive yarn-forward rule of origin, one of the options currently being
debated is a short-supply list and process. All prior U.S. Free Trade Agreements with a yarnforward rule of origin include short-supply provisions. [The only exceptions are the U.S.-Israel
and U.S.-Jordan FTAs, which are not subject to a yarn-forward rule of origin.] These shortsupply provisions have either been in the form of a list of short-supply products in an appendix
to the agreement or in the form of exceptions incorporated into the product specific rules of
origin, or both. All yarn-forward FTAs have mechanisms to designate materials in short supply.
Several also include additional provisions establishing an expedited process to accept and review
short-supply petitions.
The TPP Apparel Coalition strongly believes, at a bare minimum, that the inherent trade
restrictive nature of a yarn-forward rule necessitate the use of a variety of commercially-viable
and broad-based flexibilities, only one of which is a workable and permanent short-supply
provision. A short-supply concept may offer limited flexibility from a rigid yarn-forward rule of
origin only if:
(1) the list is amendable and the process is permanent,
(2) the accepted fibers, yarns, and fabrics are sufficiently broad so as to permit
meaningful investment in TPP countries,
(3) a reasonable and fair methodology is developed to provide a realistic assessment of
commercial availability, and
(4) there is a process to accept and review petitions to amend the short-supply list on an
expedited manner.
A proposal that does not incorporate these elements would be unworkable.
The TPP Apparel Coalition continues to believe that rules of origin for apparel should, in most
cases, be liberalized and simplified, and should generally be based on either a change in tariff
heading (CTH), a regional value content (RVC) requirement, or a combination of the two. A
change in tariff heading would require any product in an apparel chapter (chapters 61 and 62) to
be transformed within the region from any heading outside of that chapter. With an RVC rule,
the value of those processes (and the inputs they create) within the territories (including any
designated short-supply inputs) must account for a minimum percent (such as 35%) of the total
value of the garment with a specific value calculation. All other industrial goods have a CTH or
RVC rule of origin. Now that the quota system is a relic of the past, the time has come to stop
treating apparel differently than other manufactured goods. Yarn forward should be the
exception, not the general rule.
From a retail and apparel design perspective, there are inherent shortcomings with any shortsupply approach – there is surprisingly little usage of short-supply flexibilities in existing U.S.
FTAs. CAFTA, which currently contains the most liberal short-supply flexibility, provides a
good example. While CAFTA has 141 fabrics currently on a short-supply list, and a relatively
facile process to petition for changes to that list, only 3 percent of CAFTA trade with the United
States comes under the short-supply flexibility.
Short-supply designations also create other operational challenges. For example, some shortsupply designations are based on the parameters and characteristics of the yarn and fabric prior
to the manufacturing process. However, those parameters and characteristics may change once
the yarn and fabric are finished and transformed into apparel. Since CBP’s enforcement policy is
that the yarn or fabric contained in imported garments must meet the designations upon which
the short-supply designation was based, the result is to disqualify the garment for the FTA tariff
preference, and render it virtually impossible to use short-supply yarns and fabrics in these
situations.
Short-supply mechanisms, when they are able to be used, benefit the entire supply chain,
including textile companies. In fact, textile interests have been enthusiastic supporters of trade
provisions that recognize short-supply situations as well. Textile companies and trade
associations have been among the petitioners in short supply requests in the CAFTA and in trade
preference countries. Moreover, more than 100 requests for duty free relief for imports of textile
products have been made by U.S. textile companies - through their Members of Congress –
under the current Miscellaneous Tariff Bill (MTB) process. The Coalition recommends that all
of these inputs should receive immediate duty-free treatment in the TPP agreement.
Although the TPP Apparel Coalition supports inclusion of proper short-supply provisions in the
TPP, it is important to note that short-supply lists are inherently difficult to utilize from a
“fashion” perspective, because the apparel sourcing decisions are based on the fabrics required
(demanded) by designers. Designers will want to use whatever fabric they believe works for
their design, regardless of whether the fabric meets the technical definition of a product that is
approved for duty-free access relying on a short-supply definition. Moreover, the descriptions of
fabrics that are considered to be in short supply are often so technical, and even based upon the
machinery used to produce the fabric, that it isn’t readily apparent to the end user of the fabric
whether it would qualify for short supply.
Finally, with the exception of a limited number of garments that are carried over from season to
season, many retailers and designers do not reuse the same fabric from season to season, or year
to year. Using new fabrics provides freshness to the lines and allows companies to produce
fashionable apparel made from whatever fabric is “hot” at the time. This means that a TPP
short-supply process must allow for quick decisions – even with the need to coordinate with the
other TPP partner countries. The short-supply products of past FTAs provide only limited
flexibility to apparel brands, and for this reason have always been combined with other
flexibilities such as TPLs and single transformation rules of origin. A TPP with a short-supply
list and no other flexibilities would be a step backwards from past practice, and would result in a
more protectionist and trade-restrictive agreement than previous FTAs.
Below are some additional factors that retailers, importers, and apparel manufacturers consider
when analyzing the value of short supply, as well as some recommendations to improve those
factors:
Simple, Usable Technical Requirements. As mentioned above, the technical requirements that
describe a short-supply fabric in previous FTAs are very specific to a type of fabric, and are
generally not conducive to easy interpretation by an apparel designer producer. The following is
2
an example of the technical nature of one fabric description that appears on the CAFTA shortsupply list:
Two elastomeric fabrics used in waistbands, classified in tariff item 5903.90.bb: (1) a
knitted outer-fusible material with a fold line that is knitted into the fabric. The fabric is a
45-millimeter wide base substrate, knitted in narrow width, synthetic fiber based (made
of 49% polyester/43% elastomeric filament/8% nylon with a weight of 4.4 ounces, a
110/110 stretch, and a dull yarn), stretch elastomeric material with an adhesive
(thermoplastic resin) coating. The 45-millimeter width is divided as follows: 34
millimeter solid, followed by a 3-millimeter seam allowing it to fold over, followed by 8
millimeter of solid; (2) a knitted inner-fusible material with an adhesive (thermoplastic
resin) coating that is applied after going through a finishing process to remove all
shrinkage from the product. The fabric is a 40-millimeter synthetic fiber based, stretch
elastomeric fusible consisting of 80% nylon type 6 and 20% elastomeric filament with a
weight of 4.4 ounces, a 110/110 stretch, and a dull yarn.
In other US FTAs, short-supply lists, such as this technical description, are rarely used because it
is incompatible with the way designers actually choose which fabrics they want to use in their
designs, which is typically based on visual, tactile, and performance factors. To suggest to a
designer that they should use the above fabric based on the technical description is unrealistic.
Short-supply lists have historically been too technical to reverse the engineering, and unless the
company takes the approach that design takes a back seat to duty, many designers will say that
the duty savings are not worth the effort and expense, and would impede their creativity. This
complexity has created a perception that only manufacturers will have the expertise and interest
to file petitions for short-supply benefits. The TPP Apparel Coalition believes that any TPP
short-supply program must be clearly defined so that the benefits are easily available to be used
by the designers and sourcing decision-makers.
Even a “simple” short-supply fabric such as the example below will still be too technical for
designers. Typically, fabric is not selected by designers based on the average yarn number, but
rather according to hand feel, visual appeal, and performance such as durability, drape, stretch,
etc.
Woven fabrics classified in subheading 5512.99, containing 100% by weight of synthetic
staple fibers, not of square construction, of average yarn number exceeding 55 metric.
Recommendation: Fiber, yarn and fabric descriptions should be broad (e.g., all flannel
fabric or all wool or rayon blend fabric) and written in a manner that a designer or other
end user of the fabric could readily determine whether the fabric would qualify for short
supply.
Greater Testing Tolerances. To qualify for short supply, the fabric descriptions have
historically been written so narrowly that even fabrics that qualified in initial testing have failed
after apparel production due to changes that occur during production and finishing. However,
even with the broad definitions requested by the Coalition, there is a need for the TPP shortsupply process to specifically allow for tolerances when products are tested as part of the
verification of compliance. For example, if a short-supply fabric states 100% cotton, it must test
as 100% cotton. A discrepancy as minute as 99.8% cotton and 0.2% other would disqualify the
fabric from being eligible for short supply.
3
Recommendation: The definition of short-supply products under a TPP program must
include specific language to allow tolerances for any testing and verification of shortsupply fibers, yarns and fabrics. The TPP Apparel Coalition recommends that the
tolerance for the definition of TPP short-supply products should be five percent. This
matches the tolerance standards used by industry.. Moreover, no disqualification should
be permitted for garments that incorporate approved short-supply inputs as long as those
inputs met the pre-production characteristics. Short-supply designations should be
implemented in a manner that accounts for changes to the characteristics of yarns and
fabrics that qualified them for short-supply that is caused when they are finished and
transformed into apparel.
Simple, Transparent, Multilateral Process. Procedures to petition for short supply that are
complex, lengthy, or non-transparent are not workable. Unfortunately, the criteria by which a
petition is judged in past FTAs have often been not transparent or subject to political influence.
Moreover, there are inherent inconsistencies over whether a product is in short supply when the
default is a yarn-forward rule of origin. For example, just because a fabric is available in
commercial quantities in a timely manner does not mean that the requisite in-region yarns are
also available in commercial quantities in a timely manner or at a relatively comparable cost.
Moreover, the transportation costs and timing to move inputs over long distances are important
considerations in the supply chain and can alter the effective commercial availability of yarns
and fabrics. However, foregoing a short-supply process altogether is also unacceptable.
Recommendation: The TPP should contain a short-supply process through which
petitions to change the short-supply lists can be accepted and reviewed quickly. The
criteria by which a short-supply determination is made should be publicly available. The
process should be (a) open, transparent, and multinational (b) aligned with the stated
end goal of the agreement-- to facilitate trade within member countries, and (c) swift to
accommodate fast fashion needs. The criteria should be limited to the objective question
whether the fiber, yarn or fabric in question is actually produced and being exported (not
just produced for a niche market), not the subjective question whether it could be
produced. Moreover, the short-supply analysis should include whether both the requisite
inputs (fibers and yarns) and fabrics are available in commercial quantities in a timely
manner. The process should be multilateral, with factory visits allowed by TPP member
countries.
No Termination – The concept of hard time limits for short supply (or any other flexibility such
as Tariff Preference Levels) undermines the value of the flexibility from inception. The TPP
Apparel Coalition appreciates the desire to send signals to the market to spur yarn and fabric
investment within the TPP. Nevertheless, the signal that a hard time limit sends is that
companies face a real risk of not being able to source products in the not-too-distant future,
which chills usage (and the growth in apparel investment meant to be spurred by the flexibility).
Companies will in many cases take up to a year to educate supply chains on the opportunities
provided by the TPP and the rules that govern them, the time limit may prevent the additional
apparel investment that might otherwise come under a permanent short-supply process.
Recommendation: Short-supply designations should be permanent, unless revoked by a
future fact-based determination of commercial availability. Any termination of a product
from short supply should be solely based on a determination that the subject fabric is
4
available in commercial quantities in a timely manner. Such a determination should also
provide sufficient advance notice before taking effect. The Coalition recommends the
same time period as under CAFTA, with the effective date of any removal of a product
from short-supply status scheduled for 180 days from the date of the Federal Register
notice announcing the decision.
Price Must Be a Criterion – To reflect accurately whether a specific fiber, yarn or fabric is
available in commercial quantities in a timely manner, there must be some recognition that price
is one of the major factors. Commercial considerations are meaningless if price is ignored.
Recommendation: The Coalition recommends that the TPP short-supply process should
include a definition that a product will be determined in short supply if it is “not
available in commercial quantities in a timely manner at a reasonable/competitive
price.” The Coalition further suggests that an appropriate definition of
reasonable/competitive would be “within 200% of a bid from a mill in a non-TPP
Party.” [For example, if a fabric normally sells for $3.00/yard and a mill offers to sell it
at $10.00, that fabric is not being made commercially available]. As the TPP covers a
vast region, transportation costs must be factored as well.
Smooth Entry – One factor that has diminished the utility of short supply in previous
agreements arises from frequent additional enforcement and scrutiny targeting short-supply
entries. This problem greatly increases the risk of using short-supply provisions, and also
undermines the fact–based, transparent process through which a petition has already been vetted.
Recommendation: The TPP short-supply process should include a provision that creates
a voluntary pre-certification program. Such a system would encourage companies to use
the short-supply program since they could receive pre-production assurances that their
products will qualify. Pre-certification would be premised on companies providing
documentation and possible testing of samples of the short supply-approved fiber, yarn
or fabric. This type of program is consistent with other recommendations in TPP for
improved compliance and reliance on a risk-based approach to enforcement. This
program also would help to resolve some of the concerns raised earlier in this paper that
serve a disincentive for apparel brands and retailers to use the short-supply duty-free
benefits in other Free Trade Agreements. With a voluntary program, companies can gain
greater confidence in the short-supply process. From a U.S. perspective, the Coalition
envisions a process that would involve both Customs and Border Protection (through the
Centers of Excellence and Expertise) and the Office of Textiles and Apparel.
Finally, consistent with other TPP Apparel Coalition recommendations, and consistent
with the risk based approach embodied in the new Centers for Excellence and Expertise
(CEE), customs enforcement provisions should only single out short-supply entries if
there is evidence or other information suggesting a heightened risk. Companies should
be able to rely upon their status as known traders so that CBP and other TPP-partner
customs agencies can concentrate examinations on riskier shipments. For the TPP to be
a 21st-century trade agreement, the textile, supply-chain, and customs provisions must
recognize that effective enforcement measures need to be targeted and coordinated.
5