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have made them competitive. We felt that adjustment assistance was an appropriate way to go with this industry; that an infusion of capital is necessary.
Improvements can be made. The industry itself cited introduction of laser cutting machines, purchase of new sewing machines, improved service equipment, installation of automatic conveyor systems among a number of other improvements that they contemplated.
The interagency task force that reviewed this case believed that, while very beneficial, none of these plans either separately or combined would be sufficient to overcome the price differential of 50 percentage points. The administration felt that an appropriate way to go was the adjustment assistance route.
In addition to extensive export promotion activities by the Department of Commerce, 13 leather apparel firms, including 8 since the President's March 24 decision, have been certified as qualifying for trade adjustment assistance.
Of those 13 certified firms, 10 have received technical assistance and 3 have received financial assistance up to this point. Several other important factors evolving from the task force examination of this case were considered by the President.
First the large growth in U.S. imports of leather coats and jackets through 1978 was largely matched by a simultaneous increase in U.S. consumption. What happened in this situation, Mr. Chairman, was that imports created a market that was not previously existing in this country.
The bread and butter of the domestic industry has been the basic coat which is largely not ornamented or has very small ornamentation. Traditionally the leather has been of a thicker variety than that used in most imported garments.
A new process of tanning leather produced a more supple-type leather which made it easier to work and to include more intricate design. It was use of this type of tanning and more fashion oriented styling which enabled the imports to create and capture a very large market in this country.
While some domestic manufacturers have been able to make competitive coats, by and large the domestic industry is still concentrated in the basic men's coats and jackets.
Second, the demand for leather wearing apparel is highly price sensitive. This is because a leather coat is a luxury item. At the time that the large fashion demand for leather coats was increasing, peaking in 1978, imports were coming in and were extremely price competitive.
The price of hides pushed up the prices on both domestic and imported items. The result was that over the last 2 years, 1979 and 1980, both imported and domestic coats have been decreasing. Imports have declined about 30 percent a year and domestic coats have declined about 15 percent.
The result of this is that the domestic manufacturers have strengthened their share of the market but it is a declining market.
I think this points up the basic difference between the two types of coats. The imported product was a more fashion oriented item, as I said, and in times of rising prices it was the easiest item to
forego in a family's budget. Whereas the domestic manufacturers were able, because they were producing a more basic item, to continue to hang onto their market and lose it at a slower pace.
I would like to touch on the question of the hide agreement. The United States-Argentina Agreement on Hide Exports contains a provision under which the Government of Argentina has reserved the right to cancel the agreement if the United States grants relief for leather wearing apparel.
There would be a similar direct impact on hide agreements with Brazil and Uruguay. These agreements are the result of an intensive effort by USTR over the past year to negotiate agreements with cattle-producing countries to ease their export embargoes on raw cattle hides. This effort was undertaken at the behest of the tanning, shoe and other hide and leather-using industries here in the United States.
Historically, with the notable exception of the United States, most of the world's cattle-producing countries have imposed embargoes on their exports of hides. Consequently, when the world has experienced shortages, foreign demand has been concentrated on the U.S. market. This has led to dramatic increases in U.S. hide prices and dislocation in our tanning and leather-using industries.
I am pleased to report that our efforts to liberalize hide exports have been successful. Over the past year, we have had a series of difficult, bilateral negotiations with the key cattle-producing countries in Latin America. We have reached agreement with Argentina, Brazil and Uruguay on liberalization of their hide export embargoes.
Brazil replaced its embargo with a 36-percent export tax as required by the agreement. This did not lead to the movement of hides in any substantial quantity. That is why we have just negotiated an ad referendum agreement with Brazil, an agreement still needing approval of both governments, that will require Brazil to reduce its export tax to 18 percent by October 1.
Argentina currently has a 20-percent export tax although the agreement we have with Argentina requires Argentina to have a 15-percent tax at present. Argentina has argued an export tax of 36 percent in Brazil and a 15-percent tax in Argentina would cause Argentina hides to flow to Brazil for processing without allowing Brazilian hides to flow to Argentina.
We now expect that Argentina will comply with the terms of the agreement, that is, that the export tax be phased out entirely now that Brazil has decided to further reduce its export tax.
Uruguay agreed to follow Argentina's phase-out plan provided Brazil adopts a similar plan. A 36-percent Brazilian tax was not perceived by Uruguay as being equivalent to Argentina's commitment. However, we now have agreement with Brazil, as I mentioned, to lower their tax to 18 percent and the Argentines have agreed to accept that and continue the elimination of their tax.
If we were to impose additional restrictions on leather wearing apparel we would in effect be saying to Argentina, Brazil, and Uruguay that we intend to apply a double standard on this matter of trade policy. We will be saying on the one hand we expect them to eliminate the protection they have provided their leather wear
ing apparel industry while on the other we will take action to protect our own industry.
We cannot have it both ways. These countries have every reason to expect that we will avoid imposing additional restrictions on our imports of manufactured leather goods although we are not specifically prohibited under the agreement from imposing such restrictions.
A decision to do so could force these governments to reconsider their willingness to liberalize their exports of hides to the United States and other countries. In short, by imposing additional restrictions on our exports of leather wearing apparel, we would run the very real risk that one or more of these countries with which we have agreements will resume their protectionist policy.
Mr. Chairman, I think this concludes the prepared remarks. I will be glad to answer any questions. [The prepared statement follows:]
STATEMENT OF ANN H. HUGHES, ASSISTANT U.S. TRADE REPRESENTATIVE Mr. Chairman, I welcome this opportunity to appear before the Subcommittee to express the Administration's opposition to the Concurrent Resolution 383. The Adminstration continues to stand firmly behind the President's March 24 decision to deny import relief to the domestic leather wearing apparel industry.
As you know, this case was sent to the President on January 24 following a six month investigation by the U.S. International Trade Commission (USITC) under section 201 of the Trade Act of 1974. The investigation followed a petition for import relief filed by the National Outer and Sportswear Association, The Amalgamated Clothing and Textile Workers Union, the International Ladies' Garment Workers Union, the United Food and Commercial Workers Union, and the Tanners' Council of America, Inc. The Commission found that the domestic industry is being seriously injured or threatened with serious injury substantially because of increased imports of leather coats and leather jackets. The current duty on these items is six percent ad valorem. As a remedy, the ITC recommended the imposition for a three year period of the following additional duties on coats and jackets of leather valued not over $150 each: 25 percent ad valorem for the first year, 20 percent for the second year, and 15 percent for the third year.
The Administration does not deny that the industry suffered injury which was caused in part by imports. However, the President, basing his reasoned judgment on statutory economic considerations, concluded that import
relief was inappropriate in this specific case. The projected inflationary impact of import relief and the preceived ineffectiveness of such relief as a means to promote adjustment to import competition in this particular industry were crucial factors in the President's decision.
The most compelling argument against relief was the effect it would have on our continuing fight against inflation. This was especially so in light of the fact that the March 24 decision on leather wearing apparel followed by less than 10 days the President's speech announcing renewed emphasis on the national priority of fighting inflation. The Council of Economic Advisers estimated that the relief recommended by the ITC would cost consumers an estimated $70-$135 million in the first year alone, depending on the extent to which tariff increases were passed on to consumers. Further, the interagency task force which analyzed the case, including the recommendation of the ITC, determined that, although the relief recommended by the Commission would create about 4,160 new jobs, it would do so at an alarming cost of $32,500 per job.
The President decided these costs were too high. And they remain too high today. Although the Administration has been pleased with the lowering of the rate of inflation in recent months, recently-released statistics underline the need to constantly pursue the fight against inflation. Although import relief for this industry by itself might not have had a substantial impact on the rate of inflation, it would have added to inflationary pressures. Inflation is a cumulative process, and a price increase in one product strengthens arguments for increases in others.
The perceived ineffectiveness of relief for this industry provided added justification for the decision against relief. There was and is serious doubt that import relief itself would help the domestic industry to adjust effectively and become any more competitive with imports once relief expired. The industry offered no clear-cut
adjustment plan with any prospect of achieving substantially improved competitiveness in the face of import competition.
The ITC investigation of this case revealed the substantial price differences between imported and domestic leather coats and jackets, The industry reported to USTR in March that it needed an increased tariff of at least 50 percentage points for at least five years to equalize prices of imported and domestically-produced leather apparel. The Administration believed that the adjustment plans submitted by the industry, while beneficial to improving its productivity, would be insufficient to close such a large price differential. For this reason import restraints were considered ineffective and unjustifiable in terms of economic cost. For the same reason, adjustment assistance was considered the most appropriate action that the Federal Government could take to help these firms become more competitive. All of the following adjustment plans that were specifically mentioned by the industry could best be achieved through the adjustment assistance programs, which provide capital assistance and worker training, among other things:
ADJUSTMENT PLANS 1. Introduction of laser cutting and other modern machinery"; 2. Purchase of new sewing machines; 3. Improve service equipment to speed the flow of garments through the factory;
4. Add work aids for improved handling of sewing operations, e.g. needle positioners, thread cutters, and automatic Stackers for finished parts of garments;
5. Installed automatic conveyor systems to move work from one operation to the next;
6. Redesign and renovate factories, or move into a one floor plant; 7. Produce garments under own label and sell products with own salesmen; and 8. Open factory outlet stores and, thus, bypass middlemen and the Costs associated with selling to retailers.
The interagency task force that reviewed this case believed that none of these plans alone nor combined would overcome the greater than 50 percent price differential, but that with the assistance of government loans, they could be effectively implemented. Thus, the Administration is not "burying” this industry, as some have alleged, by denying import relief, but instead is recognizing the reality of this industry and consciously offering to aid in a material fashion those producers which should and can remain viable and competitive after making certain adjustments.
I would like to point out some of specific actions that the administration has already undertaken to help this industry. The Department of Commerce has had in effect since the beginning of 1979 an export program specifically designed for the U.S. textile and apparel industries. This program is funded at $2 million in fiscal year 1980 with similar funding anticipated for fiscal year 1981.
A number of market development activities have taken place under the Program. These activities include a series of market research studies on foreign markets for U.S. textiles and apparel, export seminars and workshops, sponsorship of trade shows and trade missions, invitations to foreign buyers to attend U.S. exhibitions, special studies on specific issues relevant to exporting textiles and apparel, and other export development functions.
The leather apparel industry has played a significant role in the program. The Department of Commerce has sponsored leather apparel firms at the Cologne Men's Fashion Week at Cologne, Germany, and the IGEDO Womenswear Show in Dusseldorf. Seven leather apparel companies will participate at the Cologne Show under this program this month and eight will participate in the Stockholm apparel show at the end of September. In addition, leather apparel has been, and will continue to be featured at U.S. domestic apparel shows which Commerce has encouraged foreign buyers to attend, and is included in overseas "in-store" promotions for U.S. apparel to which Commerce has lent financial support. Leather apparel firms have participated in export seminars which Commerce has sponsored both as attendees and as speakers. For example, a representative of Cooper Sportswear, a California based firm, spoke at the most recent seminar in Los Angeles.
In addition, 13 leather apparel firms, including eight since the President's March 24 decision, have been "certified” as qualifying for trade adjustment assistance from the Economic Development Administration (EDA). Of that 13 certified firms, 10 have received technical assistance and 3 have received financial assistance up to this point. In essence, firms may become "certified” if they have suffered reductions in sales, production, or employment as a result of competition from imports. There are two types of assistance. One is "technical assistance” with which EDA pays all or a good part of the cost of specialized consultants who can help businesses with marketing, engineering, financial management or similar studies. A second type is "financial assistance,” with which EDA provides loan guarantees or direct loans for
working capital, new machinery or equipment, new or renovated buildings, and similar purposes. Trade certified firms are also eligible to participate in some of the activities under the Department's Textile and Apparel Export Expansion Program at minimal cost.
The production of leather wearing apparel requires a relatively high proportion of man hours per unit, even in comparison with the production of cloth wearing apparel. Each leather coat and jacket must be cut, sewn, lined, trimmed, and finished by hand. Each piece of leather must be cut individually because of the indeterminant size or irregular quality (because of discoloration or scars) of the hide or skin. In the sewing phase, workers must use a much heavier and slower machine than that used to manufacture cloth garments. Even if some savings in labor costs could be implemented in this industry, the likely outcome of import relief would not be a sustained revival of the entire domestic industry. Rather, it would be an increase in the price of imported articles, and a shift in production from Korea and Taiwan, for example, to those countries currently enjoying even lower labor costs.
Several other important factors evolving from the interagency task force's examination of this case were considered by the President. First, the large growth in U.S. imports of leather coats and jackets through 1978 was largely matched by a simultaneous increase in U.S. consumption. And most of this growth in consumption resulted from a demand created by the widespread introduction through imports of a more stylish and refined garment that was not, and to a large extent is still not, being supplied by domestic producers. The truth is, imports created most of the increased market for fashionable leather coats and jackets. During this period of growth, shipments by domestic producers of men's coats and jackets, the area where 85 percent of domestic production is concentrated, remained fairly stable. It appeared from the analysis of the Task Force that injury in the men's segment of the industry did not necessarily result from growth in imports on the whole, but only from increasing low-priced imports in the particular market segment, volume production of basic coats and jackets, that the domestic industry heavily relies upon.
Second, the demand for leather wearing apparel is highly price sensitive. This is largely because leather coats and jackets are often considered luxury items and, thus, discretionary purchases, and, moreover, substitutes are readily available. The market declines in both domestic shipments and imports in 1979 and 1980 resulted in large part from consumer resistance to higher prices, which resulted from escalating leather prices, and reflects this price sensitivity of demand. The imposition of import relief would only raise prices more. This would further restrict the market and worsen the situation for all suppliers.
Third, the granting of import relief in this case might have had a long-term effect on U.S. export opportunities in certain large and growing markets in the Third World.
The markets of developing countries have become increasingly important to U.S. exports. They now surpass the market share accounted for by all OECD countries combined. Of the ten leading suppliers of leather wearing apparel to the U.S., nine represent markets accounting for at least $1 billion in 1979 U.S. export. The top suppliers Korea, Taiwan, Argentina, Mexico, Uruguay, and Brazil have all been gradually liberalizing their import restrictions to improve access to their markets for our products and those of other nations. We would not want to inspire a reversal of that trend.
If the President had granted import relief, a specific export loss would have been felt in U.S. exports of hides, skins, and leather. Combined, these exports totaled more than $1.23 billion in 1979, or more than five times the value of U.S. imports of leather coats and jackets that same year. Japan (a major source of tanned leather for Taiwan and Korea), Korea, Canada, Mexico, Taiwan, Hong Kong, and Uruguay were all important markets for U.S. hides and skins. With the exception of Japan, all these countries are major sources of U.S. imports of leather coats and jackets. Although most of these leather and hide exports are used in the manufacture of footwear, a Department of Agriculture analyst estimated that restrictions on U.S. imports of leather wearing apparel would lead to a reduction in U.S. exports of at least $50-$80 million.
Another important consideration in the President's decision was the impact of import relief on our efforts to improve American access to hide and skin supplies in other countries. The U.S.-Argentina Agreement on Hide Exports contains a provision under which the Government of Argentina has reserved the right to cancel the agreement if the United States grants relief for leather wearing apparel. There would be a similar direct impact on hide agreements with Brazil and Uruguay. These agreements are the result of an intensive effort by USTR over the past year to negotiate agreements with cattle-producing countries to ease their export embar