As Off-Shore Sourcing Gains Momentum Buyers Must Stay Informed
April 3, 2001
Sourcing Trend Raises New Considerations of Quotas, Quality and Customs
New York – Never before has off-shore sourcing been so appealing for textiles. But the millennium has begun with an explosion of off-shore spending as more and more U.S. mills, converters and retailers turning to global sourcing as a solution to the high costs and shrinking labor pool in the U.S. home textile industry.
Labor costs keep rising with the strength of the U.S. economy and young people are seeking jobs in fields other than textiles, according to Robert Leo, partner at Meeks & Sheppard, the law firm that serves as counsel for U.S.-based Home Fashion Products Association (HFPA).
"The U.S. textile industry has historically been a family affair with both owners and workers handing off jobs and know-how from generation to generation. But many of the companies today are facing the end of that line. The young people are choosing other professions over textiles, and the skilled labor pool is shrinking," explained Leo.
China, India and Pakistan are the first stop for many global textile shoppers, where cloth is produced at a fraction of the cost it is in the United States.
"The hot areas right now are the Far East, the Middle East and the Caribbean—the Caribbean mainly for finishing," said Leo.
"Egyptian cotton is in demand and the hot area for gray goods right now is Pakistan. We'll probably see a trend toward Vietnam when the country moves to our NTR (normal trading rate), which could happen this year."
But just finding off-shore sources for fabrics, fibers, or even a place to finish product is not enough, said Leo. Companies diving into global sourcing need to be ready for the complexities of the venture — complexities arising from the political, social and economic issues in the other countries involved as well as from U.S. Customs regulations.
"Some companies think that it must be just like shopping around the states to find the best prices, but different rules apply once you enter the global arena," agreed Diane Weinberg, also a partner at Meeks & Sheppard.
"When you make a sourcing decision, you need to look at the whole picture—such as the country's economic condition, infrastructure and air or water routes, political risks, or other trade sensitive issues," she advised. "If feasible, you should go right to the country and look around."
It may be a mistake to order fabric from a country prone to natural disasters or prone to hostility with its neighbors, for instance, because getting the fabric out of the country may be a problem, she explained. A would-be buyer should check on electrical usage and national holidays, too, she further advised, in case electrical power is limited or holidays fall at inopportune times.
The country may also have a quota on what it is allowed to export to the U.S. If so, anyone interested in sourcing there should monitor the quota status for a year—does the quota fill up quickly? What is the competition? If the quota is filling up in a particular year, can you get the goods out in a hurry? Does the country of origin sell its share of U.S. quota to companies on a first-come, first serve basis?
Productivity may also be an issue, especially if one is considering moving production to be nearer the supply sources. On the surface, it appears one could save substantially on labor costs by doing that, conceded Leo, but that is not always the case when productivity/output is low.
"Many thought Ross Perot was right when he said he could hear the giant sucking sound of U.S. production going to Mexico when NAFTA commenced. But some companies have found their productivity higher with U.S. workers and they just have the packaging done in Mexico," he said.
U.S. Customs adds another layer of complexity to the global sourcing picture. In an effort to protect U.S. interests, the agency imposes import requirements including product classifications, quotas, tariffs, country of origin marking rules, and more. According to Leo, an importer must learn a whole new vocabulary.
"It's like learning a second or third language, because it's another set of technical information," he said. His firm has tried to help obviate import issues with an "Import Issue Checklist." The Checklist notes that the importer must declare a value for the imported product and that the product must be identified, or "classified" based on the product classification number found in the Harmonized Tariff Schedule (HTS). But it also notes that the HTS is a classification directory of over a thousand pages, and that Customs also enforces other requirements, such as quotas for textiles, product standards, foreign policy-related import limits, dumping duties, and intellectual property limitations.
"It's not 'Buyer beware' so much as 'Buyer be aware,'" explained Leo. "There is so much to be aware of that could be costly to you if you don't know how to navigate the rules and regulations."
"Failure to exercise reasonable care can result in increased duties, penalties and delays in the release of shipments. Customs has to become a part of your supply chain management," Weinberg added.
Some companies entering the global sourcing arena have instituted import departments dedicated to understanding and tracking quotas, current classification listings, countries of origin, marking rules, files of special duty program compliance documents and other import concerns. Not only is the import process complex, but the regulations change with some regularity, and someone must be aware of them, agreed both Leo and Weinberg. By 2005, for example, U.S. quotas for textiles will be removed from all WTO members, but no one yet knows if visa requirements will be removed or if any protective measures will be taken to ensure the viability of the U.S. home textiles industry, said Leo. Quotas will likely remain for countries that are not WTO members.
"This will be a big change. Since the 1930's, textile production has been protected in the U.S., averaging 12 to 15 percent tariff rates as compared with the 3 to 4 percent for other imported goods," he said. Textiles have had high tariffs and quotas limiting allowable imports. The lifting of quotas for WTO members could deal a blow to the U.S. textiles industry. On the other hand, companies with import operations firmly in place could stand to benefit.
But the recent African Growth & Opportunity Act has proven that even trade preferences can be tricky. The Act, which addresses only apparel made in Sub-Saharan Africa and carries no mention of tariff benefits for home textiles, does change the rules of origin for certain fabrics regardless of their end use. And industry veterans expect that eventually the duty program with Africa will more closely resemble the North American Free Trade Agreement provisions.
"But even NAFTA requirements can be complex. For example, if you have a comforter made in a non-NAFTA country, then bring it into the U.S. for finishing, the special trade rates don't apply. But if you just have the shell made in a non-NAFTA country and fill the comforter in a NAFTA country, the finished comforter will be NAFTA eligible when it comes into the U.S.," explained Leo.
But industry sources agree that global sourcing, despite its complex nature, will keep growing for U.S. home fabrics and furnishing suppliers. In fact, speculated Weinberg, as newcomers to the supply chain become more sophisticated, they will become sources for U.S. export as well as import. And already, many U.S. importers have found that they can't be importers without being exporters because of the nature of the textile business.
In the meantime, she cautioned, companies planning import should consider compliance in the planning stages.
"More and more companies are waking up and realizing that if they're going to source, they need to be informed. They need to perform a cost/benefit analysis for each item according to its origin," she said.
New York – Never before has off-shore sourcing been so appealing for textiles. But the millennium has begun with an explosion of off-shore spending as more and more U.S. mills, converters and retailers turning to global sourcing as a solution to the high costs and shrinking labor pool in the U.S. home textile industry.
Labor costs keep rising with the strength of the U.S. economy and young people are seeking jobs in fields other than textiles, according to Robert Leo, partner at Meeks & Sheppard, the law firm that serves as counsel for U.S.-based Home Fashion Products Association (HFPA).
"The U.S. textile industry has historically been a family affair with both owners and workers handing off jobs and know-how from generation to generation. But many of the companies today are facing the end of that line. The young people are choosing other professions over textiles, and the skilled labor pool is shrinking," explained Leo.
China, India and Pakistan are the first stop for many global textile shoppers, where cloth is produced at a fraction of the cost it is in the United States.
"The hot areas right now are the Far East, the Middle East and the Caribbean—the Caribbean mainly for finishing," said Leo.
"Egyptian cotton is in demand and the hot area for gray goods right now is Pakistan. We'll probably see a trend toward Vietnam when the country moves to our NTR (normal trading rate), which could happen this year."
But just finding off-shore sources for fabrics, fibers, or even a place to finish product is not enough, said Leo. Companies diving into global sourcing need to be ready for the complexities of the venture — complexities arising from the political, social and economic issues in the other countries involved as well as from U.S. Customs regulations.
"Some companies think that it must be just like shopping around the states to find the best prices, but different rules apply once you enter the global arena," agreed Diane Weinberg, also a partner at Meeks & Sheppard.
"When you make a sourcing decision, you need to look at the whole picture—such as the country's economic condition, infrastructure and air or water routes, political risks, or other trade sensitive issues," she advised. "If feasible, you should go right to the country and look around."
It may be a mistake to order fabric from a country prone to natural disasters or prone to hostility with its neighbors, for instance, because getting the fabric out of the country may be a problem, she explained. A would-be buyer should check on electrical usage and national holidays, too, she further advised, in case electrical power is limited or holidays fall at inopportune times.
The country may also have a quota on what it is allowed to export to the U.S. If so, anyone interested in sourcing there should monitor the quota status for a year—does the quota fill up quickly? What is the competition? If the quota is filling up in a particular year, can you get the goods out in a hurry? Does the country of origin sell its share of U.S. quota to companies on a first-come, first serve basis?
Productivity may also be an issue, especially if one is considering moving production to be nearer the supply sources. On the surface, it appears one could save substantially on labor costs by doing that, conceded Leo, but that is not always the case when productivity/output is low.
"Many thought Ross Perot was right when he said he could hear the giant sucking sound of U.S. production going to Mexico when NAFTA commenced. But some companies have found their productivity higher with U.S. workers and they just have the packaging done in Mexico," he said.
U.S. Customs adds another layer of complexity to the global sourcing picture. In an effort to protect U.S. interests, the agency imposes import requirements including product classifications, quotas, tariffs, country of origin marking rules, and more. According to Leo, an importer must learn a whole new vocabulary.
"It's like learning a second or third language, because it's another set of technical information," he said. His firm has tried to help obviate import issues with an "Import Issue Checklist." The Checklist notes that the importer must declare a value for the imported product and that the product must be identified, or "classified" based on the product classification number found in the Harmonized Tariff Schedule (HTS). But it also notes that the HTS is a classification directory of over a thousand pages, and that Customs also enforces other requirements, such as quotas for textiles, product standards, foreign policy-related import limits, dumping duties, and intellectual property limitations.
"It's not 'Buyer beware' so much as 'Buyer be aware,'" explained Leo. "There is so much to be aware of that could be costly to you if you don't know how to navigate the rules and regulations."
"Failure to exercise reasonable care can result in increased duties, penalties and delays in the release of shipments. Customs has to become a part of your supply chain management," Weinberg added.
Some companies entering the global sourcing arena have instituted import departments dedicated to understanding and tracking quotas, current classification listings, countries of origin, marking rules, files of special duty program compliance documents and other import concerns. Not only is the import process complex, but the regulations change with some regularity, and someone must be aware of them, agreed both Leo and Weinberg. By 2005, for example, U.S. quotas for textiles will be removed from all WTO members, but no one yet knows if visa requirements will be removed or if any protective measures will be taken to ensure the viability of the U.S. home textiles industry, said Leo. Quotas will likely remain for countries that are not WTO members.
"This will be a big change. Since the 1930's, textile production has been protected in the U.S., averaging 12 to 15 percent tariff rates as compared with the 3 to 4 percent for other imported goods," he said. Textiles have had high tariffs and quotas limiting allowable imports. The lifting of quotas for WTO members could deal a blow to the U.S. textiles industry. On the other hand, companies with import operations firmly in place could stand to benefit.
But the recent African Growth & Opportunity Act has proven that even trade preferences can be tricky. The Act, which addresses only apparel made in Sub-Saharan Africa and carries no mention of tariff benefits for home textiles, does change the rules of origin for certain fabrics regardless of their end use. And industry veterans expect that eventually the duty program with Africa will more closely resemble the North American Free Trade Agreement provisions.
"But even NAFTA requirements can be complex. For example, if you have a comforter made in a non-NAFTA country, then bring it into the U.S. for finishing, the special trade rates don't apply. But if you just have the shell made in a non-NAFTA country and fill the comforter in a NAFTA country, the finished comforter will be NAFTA eligible when it comes into the U.S.," explained Leo.
But industry sources agree that global sourcing, despite its complex nature, will keep growing for U.S. home fabrics and furnishing suppliers. In fact, speculated Weinberg, as newcomers to the supply chain become more sophisticated, they will become sources for U.S. export as well as import. And already, many U.S. importers have found that they can't be importers without being exporters because of the nature of the textile business.
In the meantime, she cautioned, companies planning import should consider compliance in the planning stages.
"More and more companies are waking up and realizing that if they're going to source, they need to be informed. They need to perform a cost/benefit analysis for each item according to its origin," she said.
