CAFTA and US Yarns/Fabrics

June 24, 2009

Original Article followed by exchanges between AAPN members:

Textile Executives Claim CAFTA Fraud
by Kristi Ellis <http://www.wwd.com/wwd-masthead/kristi-ellis-1871669>  
Posted Friday June 19, 2009

WASHINGTON — U.S. textile executives who at one time supported the controversial Central American Free Trade Agreement told a House panel Thursday that four years of massive amounts of fraud and inadequate Customs enforcement in the region are crippling their businesses.

A subcommittee of the House Small Business Committee, chaired by Rep. Heath Shuler (D., N.C.), heard the first panel of witnesses but later canceled the second panel with the textile executives due to time constraints. The panel said it would review written testimony and communicate via e-mail.

Textile executives are calling on Congress and the Obama administration to overhaul the textile enforcement division of U.S. Customs & Border Protection and crack down on what they claim are soaring levels of fraud in Central America and other trade preference areas.

The alleged fraud in Central America has left a bitter taste with the half of the textile industry that supported CAFTA after receiving assurances from the Bush administration in 2005 that there would be strong Customs enforcement.

Dan Nation, president of Parkdale Mills Inc., the largest yarn spinner in the U.S., and D. Harding Stowe, chief executive officer of R.L. Stowe Mills, which shuttered in January, said foreign companies are circumventing the strict rules of origin under CAFTA and the North American Free Trade Agreement. They said companies are producing yarn in countries like China or Pakistan, shipping it to the U.S. and falsifying affidavits of certification as “Made in the U.S.” to gain duty free benefits on apparel made in Central America or Mexico with the yarn that is then imported to the U.S.

Stowe, whose third generation textile company hosted President George W. Bush at his factory in 2005 during a pro-CAFTA tour to reassure workers the trade agreement would not hurt their jobs, said in his written testimony that “the lack of Customs enforcement was an important factor in our decision to close the business.”

“CAFTA is good for the U.S. textile industry,” said Nation, who estimates 1,200 jobs were eliminated due to fraud and inadequate enforcement, which undercut Parkdale’s business. “It is an important part of it, but it has to be [enforced] the way it was designed. What has happened now are companies like Harding’s and mine are playing by the rules and the cheaters are winning.”

Nation also pointed to government data in 2008 that showed twice as much combed cotton yarn was being exported from the U.S. as was actually being produced.

In written testimony, Loren Yager, director of international affairs and trade at the General Accountability Office, said Customs has made some improvements in textile trade enforcement but “trade enforcement issues continue to present long-term challenges with significant revenue implications for the U.S. government.”

Dan Baldwin, assistant commissioner of Customs, who testified before the hearing was cut short, acknowledged several types of textiles fraud currently exist and defended his agency’s focus on enforcement.

“We recognize the vital importance of the textile industry to this country,” said Baldwin. “We will continue to focus a substantial amount of our trade enforcement resources in this priority area to help protect our domestic industry and its vital role as an employer in our economy.”

He said 68,000 importers shipped $105 billion of textiles and apparel and textiles to the U.S. and paid over $11 billion in duties (42 percent of the overall total collected) in 2008. Of that $105 billion, Baldwin said about 19 percent claimed trade preferences and of that 19 percent, Customs found over 35 percent were ineligible for the claimed preference.

Baldwin, seeking to counter industry allegations, said the agency hired an additional 72 textile import specialists mandated by Congress and currently employs 329 textile import specialists, up from 264 in 2006.

John Peden of Patmos Distributors, Inc. writes: Mike - We have been operating in Guatemala for fifteen years.  Without CAFTA we would have closed several years ago.  Several times a year we receive inquiries from the Dept. of Homeland Security/US Customs and Border Protection requesting information about our sources of yarn and textiles to verify we are operating within the Agreement.   Since we only use Central American spinning mills, we can easily provide the answers to our Customs Entries.   Usually, its just a paperwork question. My point is that they do check, and attempt to keep everyone in line with the CAFTA agreement.   Without CAFTA our Company and employees in the US would cease to exist.   Just play by the rules......

A textile CEO writes:  Mike, the system is broken with regard to enforcement of trade rules and regulations.  Our trade agreements are a joke.  Not unlike enforcement of immigration law.  Those that profit by the lack of enforcement of our duly make laws, rules, and regulations are enriching themselves on the backs of the American Taxpayers.  Frankly, “I am mad as Hell.”

Trade Attorney Jon Fee of Alston & Bird writes: Dear Mike:
Since this is related to my area of law practice, I hope my comments might be of some value to you.
1.    We have a number of clients who receive information requests from CBP and undergo CAFTA-related detentions in the most active CAFTA ports, challenging their CAFTA claims.  This activity is usually consistent with proper CAFTA enforcement.  For example, an information request will ask the importer to provide his fabric and yarn affidavits, proof of movement of inputs, and proof of manufacturing operations in the region.  Affidavits themselves are scrutinized by CBP personnel for authenticity.  We are aware, for example, that CBP sometimes calls our clients' suppliers of yarn and fabrics to confirm that affidavits are genuine.  
2.    But unsupported claims are probably still being made.  Harding Stowe said in his testimony that CBP does not appear to have adequately staffed the ports with trained enforcement personnel.  The biggest problem, which would be hard to solve, is that only the importers are challenged and punished, so that cheating yarn or fabric suppliers don't get caught because they are not responsible as importers.  Consider an importer who receives a false yarn affidavit.  He may have been genuinely duped by a bad supplier.  His goods get stopped, he has to pay the non-CAFTA duty, and he could even be penalized.  But the bad guy who gave him the phony affidavit remains untouched because he is not the importer.  Even the importer has little recourse against him, because the importer probably paid for the yarn long before his import got questioned.  The bad guy probably knows that, for every one of his customers that gets caught, there are many more whose imports are not challenged, so he can keep selling bad yarn and making money without any realistic consequences.  CBP could possibly be more creative in its enforcement efforts by going after the non-importer bad guys and their agents.  The CBP penalty statute can be stretched to cover any person, not just the importer, who participates in the illegal importation of noncompliant goods.  It would be a hard case to build, since most of CBP's enforcement tools are focused on importers; but one or two well publicized cases could have a greater deterrent effect than presently exists.   
3.    Many of the yarn spinners have (I think) documented particular instances of phony yarn affidavits and, as Harding indicated in his testimony, have identified phony yarn and fabric companies.  I assume without knowing that they have presented their evidence to CBP; but I do not know what CBP has or has not done with the evidence.
4.    With all this said, we can be assured that there are many conscientious CBP personnel, particularly in Janet Labuda's office, who are actively and creatively involved in challenging and demanding support for CAFTA claims.  I don't think it is wise to he hypercritical of CBP personnel without giving proper credit to the personnel who genuinely do a good job.
5.    We in the customs bar spend most of our time representing reputable importers in their compliance efforts and helping them lawfully exploit CAFTA's proper opportunities.  Sometimes we find ourselves defending them against unreasonable CBP claims, which can happen even under the best of government intentions.  But we don't run across many bad guys -- bad guys don't consult lawyers until they get caught, and not many bad guys have been caught.  
6.    Unfortunately, we will never be able to measure the extent of wrongdoing.  Like Frenchmen who cheat on their tax returns, illegal importers aren't going to respond to surveys, and their unreported wrongdoing is masked as legitimate activity in census and other trade statistics.
    Maybe I'm stating the obvious; but I felt obliged to my friends at AAPN to comment nevertheless.

Gerald L. Cauthen, VP, Contempora Fabrics, Inc. writes: It says it all in the article. There is no doubt we have lost ground to improprieties in the region and the world.  The gate was opened and the horses called "no scruples" have been running  toward the only food supply, and when the day comes that the food supply is gone, all horses will die.  I think original intent was good but as those of us who foresaw this now know, our worst nightmares were realized through modifications of the agreements, inclusion of everybody (sort of like the TARP fiasco) and lack of enforcement which was known from the beginning.  Help starts at home.  When we can, we help our neighbors.  Then the rest of the world might follow.  But to kill the golden goose who consumes everything not made in the US only hastens the demise of our economy.  Job gains will not be realized with the looseness of today's rules and enforcement.  It even lures US companies to the brink of cheating which is sad.  Ask Harding how it hurt to lose all of his employees.  It hurts every time to see the moves that are so transparent.  We just have to open our eyes.  The world only cares for us when our pocketbooks are open.  Mine is almost empty.  And apparently we are not the only ones.

A journalist writes: The enforcement issue of trade agreements always raises big questions. Lack of enforcement leads to skepticism of new agreements, like FTA's with individual countries. Once a duty free relationship is established, those who have been burned in the past simply question whether a new pipeline for misrepresented goods has been opened.
   Dan Nation's testimony is pretty straight forward - companies are cheating. Blanket affidavits don't work. Customs for some reason has challenges with some of the most blatant cases. The math of US production vs. reported consumption for CAFTA imports doesn't work in some cases.
   In the end, lack of enforcement and cheating cheapens CAFTA and puts a false face on the true effectiveness of the agreement. It is the same with any regulatory body. If FDA does not enforce its regulations properly, the safety and effectiveness of food and drugs are compromised. If law is not enforced, bad guys win while good guys comply.
   Mike, as you raised the question of getting rid of  "yarn forward", maybe lack of enforcement is the best solution -- make the agreement, get the compromises based on the rules of the treaty, then just walk away.....
   Thing thing that got me was that the testimony wasn't anti-CAFTA, it was more about getting CAFTA to live up to the promise that drew the support in the first place.

Bryan Ashby, Carolina Cotton Works writes: As a US manufacturer of textile fabrics, it is our duty to comply with whatever legislation our lawmakers decide on.  When it comes to CAFTA, the rules are simple.  US (or regional) yarn forward.  It appears that this legislation, in its present form, allows our peers from outside the US, who sell to our market here in the US, to comply with rules of origin using the "honor system."  It is unfortunate, however, that there are those who are not subject to our laws, who choose to ignore the regulations for rules of origin for CAFTA.  Unfortunately, as noted in the recent testimony is Washington, that system is obviously flawed because these companies are obviously not subject to the same level of penalties as those of us producing in the US are.  Apparently, there are some who feel that low cost labor is not enough to compete in a global economy.  It is disappointing that there is no justice for those who do business this way.  One must wonder what a US buyer would do if they knew that their supplier was breaking the rules and using CAFTA for duty free trade into the US.  

Scott Vaughn of Recedes in Nicaragua writes:  I have spoken to representatives from the region and all are asking for the same thing – name names !! who is doing this ? tell us who they are and we will tell you where they live !!
    Once again the USA textile industry has forgotten who their only customers are !! or maybe they plan to sell into China, Vietnam, India, Cambodia….. where everyone is in strict compliance with the laws ?
    I know USA customs are in Nicaragua for two weeks right now doing audits in virtually every free zone factory. If they tell us who is cheating we can save customs a second trip down !!
 
Chandri Navarro-Bowman of Hogan & Hartson LLP writes: Mike-
Because the hearing got cut short due to members needing to go vote, none of the NCTO members were able to speak, and Erik Autor of the National Retail Federation didn't get to speak either.  Customs does audits based on risk.  So, generally, when Customs chooses entries to review, it is doing so based on risk factors.  It is not surprising therefore that the non-compliance rate is as high as Customs indicates.  This would indicate that Customs' risk targeting works.  Of the entries that are not in compliance, of course there are some that are intentionally non-compliant or fraudulent, but there are certainly numbers of entries which were inadvertently ineligible or for which the importer simply could not provide the paperwork necessary to provide eligibility.
    It is a real shame that textile executives are trying to claim that CAFTA fraud is what is putting them out of business and that CAFTA is bad for the US economy.  We all know that if importers cannot use preferential programs such as CAFTA, they simply will go source in China or Vietnam and then there will be no regional content in any of the apparel being imported.  The question is, how much textile related production and jobs has remained in the US and in the region because of CAFTA, CBTPA , ATPDEA, Peru FTA and HOPE?
    The lesson here is, apparel imports generate a huge percentage of the duties collected by the US Treasury.  The US Government is in current need of serious cash to pay for bank and auto company bailouts, among other expenses in this economic recession, and going after apparel imports that could potentially provide duties and penalties seems like their plan.  Therefore, apparel importers should cross their T-s and dot their i's and make sure they have verified compliance with the rules of origin of the FTAs or preference programs they are using, and that they have the documentation in their possession to prove eligibility.  We have already started to see an upsurge in Customs' Requests for Information (CF28's) for entries claiming FTA preferences.  This is not CAFTA specific, it cuts across all FTAs and preference programs.  Customs' risk based approach targets certain countries, certain importers, certain types of goods.  So importer beware.

Retail Executive writes: I believe there are probably some elements of fraud related to yarn certification. Both Mr. Nation and Mr. Stowe have the right to call this out. Perhaps this will lead to establishing new standards for authenticating the country of origin for yarn and other inputs that impact CAFTA.  This would not be bad. Perhaps there will be a suspension of the CAFTA program until a full investigation can be conducted.  This would be a disaster and cripple the already fragile sector that relies on CAFTA. Never say never. Is it worth the risk?

Tags: CAFTA , Central America , laws , textiles , trade , yarn , yarn forward

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