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record imports, there has been a clear inverse relationship between the profitability of the domestic industry and the wholesale price index for tanned leather. Thus, the profitability of the domestic leather apparel industry is much more closely related to the wholesale price of tanned leather than it is to the level of imports. This correlation results of necessity since the cost of leather is reported to constitute 54 percent of the cost of manufacturing an article of leather wearing apparel.
Any injury which the domestic industry may be suffering as a result of increased raw material costs is not unique. The entire leather apparel industry worldwide is in the same position. Foreign producers are even more seriously affected since leather costs constitute between 65–75 percent of their FOB costs. Certainly U.S. importers were adversely affected by the 33.7 percent decline in import quantities in 1979. Importers unanimously blamed this decline in imports on rapidly escalating prices which caused a steep decline in demand as leather coats and jackets are forced out of the price range of the mass consumer market. While raw material prices have eased during recent months, the overall slowdown in the economy has undoubtedly affected both imports and domestic production equally. Any current fall in production, employment and profitability is obviously the result of the recession and cannot be blamed on imports, which continue to plummet.
The International Trade Commission's remedy recommendation was based on faulty data and erroneous assumptions.
It appears that in reaching its remedy recommendation the Commission attempted to determine the amount of duty increase that would be required to equalize the average wholesale selling price of imported and domestic men's and boys' coats and jackets. The Commission's determinations were, unfortunately, based on data that is highly questionable and on basic assumptions which are simply erroneous.
The ITC staff received importers questionnaire responses from 31 importers which represented 17 percent of total U.S. imports in 1978. In view of the large number of small importing firms involved we would consider this a very representative response. However, throughout the ITC staff report actual questionnaire response data is ignored in favor of data from a 6-percent “New York” sample which was prepared by analyzing all 3,500 entries of leather apparel made at the port of New York in the month of August for the years 1975–1979. Apparently the ITC staff felt that this sampling effort was required because it believed that importers who responded to the questionnaire generally imported higher priced merchandise and that the results would therefore be skewed if the questionnaire response data were used.
We believe that the perception that average FOB was overstated in questionnaire response data was wholly unwarranted. On the contrary, the “New York” sample is inadequate because it deflates average FOB prices in including in the average unit values of imported leather coats and jackets, patchwork garments produced from leather scraps, combination leather and knit textile sweater-jackets which are sold as sweaters and not as coats and jackets and, therefore, do not compete with leather coats and jackets at all, and leather garment shells imported from Latin America.
As a result, the “New York” sample is statistically unreliable. This was confirmed by a survey of our clients' purchase prices made in early 1980. This survey established that our clients imported more than 290,000 units in 1979 with a total value of over $13,750,000. This represented 9.4 percent of all imports of men's leather coats and jackets, a very significant percentage considering that importer-retailers have a large share of the import market. The average FOB price on our client's imports in 1979 was $46.80 which is 30.8 percent above the $35.76 figure obtained from the “New York” sample.
Since the “New York” sample understated the average FOB price of imported leather coats and jackets by 30.8 percent, the relief perceived to be necessary to eliminate the alleged margin of underselling enjoyed by imports was based on inaccurate data and the ITC recommendation was fatally flawed.
In addition, there is also an obvious error in the methodology utilized by the ITC staff to arrive at a comparison of wholesale prices for domestic and imported leather coats and jackets.
The ITC staff report purports to calculate an average landed, duty-paid importers wholesale price with mark-up, by starting with FOB prices and adding a 10-percent factor to the FOB price to get a landed duty-paid price and by then adding a 20percent factor to that result to obtain the importer's wholesale price. These factors are so seriously understated as to fatally skew any results obtained therefrom.
The importers we represent furnished us with actual figures as to the differences between FOB prices and landed duty-paid costs and as to their mark-ups to reach a wholesale price. Their data establishes that landed cost exceeds FOB price or first cost by 11.0 percent to 20.0 percent with a weighted average of 16.4 percent and that
their mark-up to reach wholesale ranges from 25.0 percent to 69.5 percent, with a weighted average of 45.7 percent.
In attached Table 2, we have compared average domestic wholesale selling price, as determined by the ITC, with average imported wholesale selling price, as determined by the ITC, and as established by the survey of our clients.
Our analysis demonstrates that in 1979 imported men's coats and jackets did not undersell the domestic product. In fact, our survey (which covers a cross-section of importer-distributors accounting for at least 9.4 percent of imports of men's and boys' coats and jackets) shows that the domestic product undersold the imported product by 13.6 percent.
Accordingly, it is apparent that the overall average unit value of imported men's coats and jackets is not lower than the average wholesale value of the domestic product. Therefore, it naturally follows that no remedy is required to eliminate a non-existent margin of underselling.
Finally, we would note that in the area of women's coats and jackets the case against the need for an import remedy is even more persuasive. ITC staff data shows that imports of women's leather coats and jackets declined by a shocking 55.9 percent in 1979, a rate of decline much higher than that experienced by the domestic industry. For the period January-May 1980, as compared to January-May 1979, the decline on a value basis was 40.9 percent (47.7 percent adjusted for inflation). Moreover, when ITC staff data on FOB prices is subjected to the realistic mark-up utilized in our analysis it is clear that the average wholesale unit price of imported women's leather coats and jackets is increasing at a frightening rate. In 1978 according to the “New York” sample the average price at wholesale was $46.13. In 1979 the price had jumped to $60.42, an increase of 31.0 percent. In the same period domestic average unit prices as reported by the ITC staff rose by only 23.7 percent. Thus, as in the case of men's leather coats and jackets, no relief is warranted with regard to women's leather coats and jackets.
The imposition of the duty increases would destroy U.S. importers who created the market for leather apparel without promoting adjustment by the domestic industry.
The data computed by the ITC staff on domestic production confirms that it was importers who created the domestic market for fashionable leather coats and jackets. The domestic industry has maintained relatively steady production levels for the past five years, and has not increased capacity to any significant degree. Between 1975 and 1978 domestic capacity increased by a mere 3.9 percent, while apparent consumption was soaring by 86.4 percent. The domestic industry has maintained its stable market for basic styles which do not require the high degree of craftsmanship, only available abroad, while importers have built a new and substantial market with fashionable, highly detailed, quality garments which require skilled handwork which is unavailable or too expensive for U.S. manufacturers.
Unfortunately for importers and domestic producers alike, an increase in the rate of duty applicable to leather coats and jackets will have a tremendously adverse effect on the entire industry. The obvious decline in demand for leather coats and jackets in 1979 and 1980 is potent testimony to the fact that the price increases necessitated by sharp increases in the price of tanned leather and general inflationary pressures have pushed leather apparel to the absolute highest price the buying public will accept. Leather coats and jackets are not necessities. Few if any consumers rely on leather coats or jackets as their only form of outerwear. Purchases of leather coats and jackets are entirely deferrable, and easily replaceable with cloth or down apparel purchases. From the above, it is apparent that the elasticities of demand are such that any further price increases will cause the market to literally dry up. As attached Table 3 demonstrates, a duty increase of 25 percent using data supplied by our clients would increase the retail price of the average priced imported produced by $34.08.
If the importer's prices are forced up by this amount their volume will drop off even more sharply. ITC data indicated that the weighted average price increase for men's and women's leather coats and jackets in 1979 was $10.27 at wholesale. Since this increase caused a decline in unit imports of 33.7 percent, it is obvious that a further increase of $17.04 at wholesale would destroy the moderate price market for leather apparel. As a result, U.S. importers of leather coats and jackets, who are American businessmen and their employees, would be driven out of business with no gain for the domestic industry. In this regard we note that a survey of our clients led us to conclude that there are approximately 2,500 jobs in New York City, and 5,000 nationwide dependent upon the importation of men's and boys' leather apparel alone-not considering those employed by women's and girls' apparel importers, retailers and related industries. The disappearance of 50 percent to 75 percent of
present consumption-which is our estimate of the probable effect of the ITC recommendation-would be disastrous for these workers.
Even if imported leather were to disappear entirely from the U.S. market, as a result of the imposition of a remedy such as that recommended by the ITC, it is clear that the domestic industry would be completely unequipped to take up the bulk of the business created by the forced exodus of importers. ITC data states that importers supplied the U.S. market with over 9.7 million units in 1978. Yet, according to the staff data the U.S. industry had unused capacity of only 630,250 units in 1978. Even assuming that the domestic industry could gear up to 100 percent capacity utilization in a very short time, it would still be able to supply only 6.5 percent of the market currently supplied by importers.
Cutting leather by hand and sewing leather with slow heavy duty machines is tedious and painstaking labor that is extremely unattractive to today's young workers. As a result, the domestic industry finds it can't entice workers into taking these jobs. The experience of those in our group with experience in domestic manufacturing is that skilled cutters, particularly are unavailable domestically and must be brought in from abroad most often from the Far East. Thus, it is apparent that with or without imports the domestic industry's ability to produce leather coats and jackets is subject to an unexceedable limit due to the unavailability of qualified new workers. We are unaware that one of the objectives of U.S. trade legislation is to stimulate immigration. However, the domestic industry is not threatened with imminent demise. Through its efficiency and its use of high technology it has been able to continue to produce its basic items, as opposed to high fashion garments, at a competitive price. In addition, the industry is apparently now exploring the possibility of supplementing its stable U.S. market through exports. Although exports are still obviously a minor factor, accounting for only about 3.4 percent of domestic shipments in 1978, they are growing rapidly as evidenced by a 92.5 percent increase between 1975 and 1979. In the first five months of 1980, while imports plummeted, U.S. producers increased their exports of leather coats and jackets over the same period of last year by 149 percent on a value basis. Obviously, the domestic industry was making only minimal efforts in this area as recently as 1975. Since then it has scored impressive gains and we believe these gains have been recorded on a less than maximum effort to explore new markets. We certainly do not suggest that exports are a panacea for the domestic leather industry but they do seem to offer an opportunity for growth that may be more important than any gains that could be derived from the imposition of a 25 percent duty increase.
The import relief recommended by the ITC would be highly inflationary and would deprive consumers of quality leather garments.
An increase in duty of the magnitude suggested by the ITC is on its face dangerously inflationary. In 1979 about a quarter of a billion dollars worth of leather coats and jackets were imported into the United States. An increase in duty of 25 percent would increase the landed cost of these imports by $62,500,000. This cost would have to be passed on to the consumer and would obviously contribute to the inflationary pressures which the President and the Congress have been struggling to keep under control.
Needless to say, it would be bad enough if the only effect of the ITC's recommended remedy was a further fueling of inflation and the imposition on the consumer of a needlessly higher cost for leather garments. Unfortunately, as we have already pointed out, the actual effect of a 25-percent increase in duty would be even more severe. Fashionable, quality leather apparel would become a luxury item beyond the budgetary limits of the vast majority of Americans. Importers of moderately priced leather apparel will be forced to close down and lay off their U.S. work force, as the market they created for leather apparel becomes a mere transitory fashion trend of the past due to government intervention in the marketplace.
To date, the U.S. consumer has obviously been pleased with the leather fashions that have been offered by importers in recent years. Unfortunately, the consumer is only interested in this product if it is offered at a moderate price. The ITC's recommended remedy will cause the average retail price of an imported men's leather coat or jacket to soar by more than $34.00. Consumers simply are not willing to pay this price. Thus, U.S. consumers will bow out of the leather apparel market en masse. They will, of course, be able to continue to purchase wool or down garments as alternatives to leather, but they will obviously have suffered a net loss if high quality fashionable leather apparel is no longer within their price range.
Import relief would have an adverse impact on related industries and on U.S. trade.
In considering House Concurrent Resolution 383, the Committee also must weigh the effect of the proposed remedy on other industries in the United States. The vast majority of all leather apparel imported into the United States from both Taiwan
and Korea is produced from hides originating in the U.S., some of which are tanned in the U.S.; some of which are tanned in Korea or Taiwan; and much of which are tanned in Japan.
Table 4 attached shows the very substantial volume of U.S. exports of hides and of tanned leather.
Obvisouly, all hide exports are not ultimately used in the production of leather apparel. However, the U.S. hide and leather industries employ a substantial number of workers. Many of these workers would be faced with unemployment if the ITC's recommended remedy is accepted, since the drastic decline in demand for leather apparel, which is inevitable given the elasticity of demand for these products, would result in a similar decline in the market for U.S. hides and tanned leather. The U.S. hide industry clearly needs its export markets, since in the first five months 1979, 73 percent of its production was exported. An important portion of this export market will dry up if the ITC's recommendation is implemented thereby adversely impacting on overall U.S. employment and on U.S. balance of payments.
Under the internationally recognized rules of the General Agreements on Tariffs and Trade (the GATT), countries whose trade is restricted by escape clause action are entitled to compensation. Such compensation would be obtained through retaliatory action against U.S. exports of comparable volume.
Table 5 attached sets forth the quantity of U.S. exports to major countries that could be subject to retaliation assuming 1979 import levels are a basis for compensation.
Obviously, U.S. exporters could be badly hampered by compensation action. It would naturally follow that U.S. exporters would have to cut back on their employment. This type of unemployment may be less visible than other forms, but it is still just as real to the individuals involved, and must be carefully considered by the Committee.
This Committee should reject House Concurrent Resolution 383, which would result in an increase of 25 percent ad valorem in the duty on imports of leather coats and jackets, for the following reasons:
Imports have fallen rapidly during 1979 and 1980, apparently in the range of 3040 per cent per year;
The problems of the domestic industry are not caused by high fashion imports, which have created the U.S. market, but by high raw material costs, inflation and recession;
The ITC analysis which led it to recommend the 25 percent ad valorem increase in duty was based on erroneous data and assumptions which grossly understated the prices of imports. Average import prices are actually above average domestic prices;
The duty increase would cost the jobs of large numbers of workers in the New York area and nationwide, without benefiting U.S. workers, since there is no pool of skilled leather workers who can produce high fashion garments;
The duty increase would be highly inflationary; would adversely affect U.S. hide exports; and could lead to significant retaliatory action by our trading partners.
This is obviously not an appropriate case for the exercise, for the first time ever, of the Congressional authority to override a Presidential determination under the provisions of the Trade Act of 1974.
TABLE 1.- DOMESTIC INDUSTRY PROFITABILITY VERSUS U.S. WHOLESALE PRICE INDEX FOR TANNED
TABLE 2—LEATHER WEARING APPAREL : IMPORT AVERAGE UNIT VALUES AT VARIOUS STAGES
TABLE 3.-RETAIL PRICE INCREASE THAT WOULD RESULT FROM IMPLEMENTATION OF THE ITC'S
Duty at 6
Duty at 31
$46.80 66.18 96.42 192.84
TABLE 4.—EXPORTS OF HIDES AND SKINS AND TANNED GARMENT LEATHER, 1978–79
TABLE 5.-LEVEL OF COMPENSATION WHICH U.S. EXPORTS COULD SUFFER IF ITC REMEDY IS
Import value by
Escape clause duty
$59,605,000 25,938,000 8,311,000 4,966,000 4,151,000 3,311,000
Ad Hoc GROUP OF LEATHER APPAREL IMPORTERS/DISTRIBUTORS