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El Toro Bravo, New York, N.Y.
Mr. KASTLEMAN. My feelings have been summarized by Mr. Suchman and the rest of the panel.
Mr. GIBBONS. Mr. Yeston?
STATEMENT OF DAVID SIMON, COUNSEL, BOARD OF FOREIGN
TRADE OF THE REPUBLIC OF CHINA (TAIWAN) AND TAIWAN LEATHERWEAR PRODUCERS AND EXPORTERS
Mr. SIMON. Thank you, Mr. Chairman. My name is David Simon. I am with the firm of Bregman, Abell, Solter & Kay, I will be brief, as my collegues have been.
On the question of the price sensitivity of leather wearing apparel, this is an extraordinary industry, in that we do have very good and very clear data on the degree of price sensitivity and therefore on the effect of a 25-percent tariff increase such as the ITC recommended.
According to the Commission's report, in the first eight months of 1979 versus 1978, average unit values of all leather wearing apparel imported in the United States increased by 27.2 percent. During that same time period imports decreased by quantity by 25 percent, roughly a 1 to 1 ratio. You get a one percent increase in price and it gives you a 1 percent decrease in quantity.
Now, we have already had a 40 percent decrease in the value of imports entering into the United States in the first 6 months of this year relative to last year. If you add a 25-percent tariff increase on top of that, the decrease in imports will be horrendous; it will essentially put the exporting manufacturers out of business.
Now, what would the effect of that be? The Tanning Council, which is a domestic organization, compiles statistics on the export of garment and glove leather to each country to which we export. In 1979 domestic production of cattle hide glove and garment leather in the United States was 72.2 million square feet. Of that, 33.4 million square feet, 46 percent, was exported. Of those exports, Taiwan and Korea together bought 16.7 million square feet, or 50 percent of all exports, or about 23 percent of U.S. production of cattle hide garment and glove leather.
Now, I don't have—because the Tanning Council does not publish-statistics on garment grade sheep and lamb leathers tanned in the United States, but in 1979 total exports to Taiwan and Korea amounted to 2.5 million square feet. In other words, Taiwan and Korea, which are the two major sources of leather wearing apparel, are major importers of U.S. tanned leather. I am informed by my clients in Taiwan, that the remainder of the leather which they purchase from foreign sources other than the United States is U.S. leather that is tanned abroad, generally by processes that are not available in the United States.
In addition to that impact of this decision on the leather industry in the United States, I think as a matter of historical interest it is significant that it was the importers, working with the American tanners, who developed these leathers in the first place in the early 1970's that made garment grade leather available at a price that the mass market could afford. That is the basic reason behind the fact that imports created this fashion leatherwear market, because they created the leathers, working with the U.S. tanners.
One other point I would like to make that I don't think has been mentioned before is the following:
In regard to the effect of import relief on the domestic work force, in the first half of 1978 and in the second half of 1978 there were zero imports of leather wearing apparel under TSUS item 807. In every month since January 1980 there has been an increase in TSUS 807 leather wearing apparel imports to the point where in the month of June 1980 total TSUS 807 imports of leather wearing apparel amounted to $1.1 million.
At first, those imports came solely from Mexico. In December 1979 we had a second entrant country under the 807 category, namely, the Dominican Republic.
Mr. GIBBONS. What is the 807 category? Mr. SIMON. That is a mechanism whereby a part of the value added is done in the United States and then abroad.
Mr. GIBBONS. I understand.
Mr. SIMON. What these figures suggest to me is that the domestic industry has found a way to compete with imports. It does the most labor-intensive part of its manufacturing process offshore, and then reimports under 807.
I would suggest that if import relief is given, in order to maximize the labor savings that are available in the world market today, you will see a further flow of labor-intensive stages of manufacturing into neighboring countries such as Mexico and the Dominican Republic. This might help the profit picture of the domestic industry. It is certainly not going to help the labor picture.
And that concludes my comments on specific points.
I urge the subcommittee to reject the resolution and allow the industry to proceed with its current 6 percent tariff rate.
[The prepared statement follows:)
STATEMENT OF DAVID SIMON ON BEHALF OF THE BOARD OF FOREIGN TRADE OF THE
REPUBLIC OF CHINA (TAIWAN) AND THE TAIWAN LEATHERWEAR PRODUCERS & ExPORTERS
The Board of Foreign Trade of the Republic of China (Taiwan) and the ROC leatherwear producers and exporters oppose H. Con. Res. 376 for the following reasons:
1. The President's decision to deny import relief was economically sound, being premised on the inflationary impact of a tariff increase, the erosion of demand that such relief would cause, and the likelihood that relief would not enable the domestic industry to compete once relief expired.
2. Since the time of the ITC's report, imports have plummeted by 35 percent, and this decline continues to accelerate. Therefore relief is not needed.
3. The ITC's recommendation is premised on demonstrably erroneous assumptions concerning the quantity and unit values of imports. As a result, the ITC's remedy recommendation is excessive and in violation of U.S. trade laws and the GATT.
4. The major benefits of import relief, if granted, would be likely to flow not to U.S. workers but to Mexican and Dominican workers in TSUS 807 operations.
5. Relief would injure the U.S. tanning industry, which is the principal supplier to the major leatherwear exporting nations.
This statement in opposition to H. Con. Res. 376, providing for an override of President Carter's determination to deny import relief as to leather wearing apparel, is submitted on behalf of the Board of Foreign Trade of the Republic of China (Taiwan) and the Taiwan leatherwear producers and exporters by David Simon, Esquire, of Bregman, Abell, Solter and Kay, whose address is Suite 610, 1900 L Street, N.W., Washington, D.C. 30026. Mr. Simon is duly registered as an attorney representing the Board of Foreign Trade of Taiwan, pursuant to 22 U.S.C. 612. A copy of that registration has been provided to this Committee pursuant to 22 U.S.C. 614(f). The Board of Foreign Trade is an agency of the Ministry of Economic Affairs of the Republic of China (Taiwan).
I. SUMMARY The reasons advanced in opposition to the Congressional override of the President's decision to withhold import relief are summarized as follows:
1. President Carter's analysis of the leather wearing apparel industry and market was correct and his decision to deny import relief was economically sound. That decision was grounded on the following facts (45 Fed. Reg. 19543 (March 26, 1980)):
a. Import relief would be inflationary. b. The price increases resulting from import relief would erode consumer demand.
c. The goals of the domestic industry-purchases of new equipment and implementation of improved marketing techniques—are adequately ensured through adjustment assistance.
d. The labor- and materials-intensive nature of the industry is such that it is not clear that the industry would be in a position to compete once relief expires.
2. The International Trade Commission (ITC) erred in recommending relief, for the following reasons:
a. The ITC improperly defined the domestic industry, failing to distinguish between the subindustries, as defined in the trade, of grain (smooth) leather fashionwear and split cowhide (buckskin type) outerwear.
b. The IÎC statistical extrapolation of the quantity of imports-made necessary because import data are reported only by value-was premised on wrong assumptions and is demonstrably inaccurate.
c. The ITC estimate of unit values of imports is inaccurate.
d. The ITC data base for the domestic industry was not large enough to provide reasonably accurate data.
e. The ITC erred in failing to appreciate that the huge increase in raw materials costs-rather than imports—in 1979 was the chief cause of whatever injury the domestic industry may have suffered.
3. The relief recommended by the ITC was excessive and in direct contravention of the principle (embodied in the GATT and the U.S. law) that the type and degree of relief to be afforded must be that which will be least injurious to foreign suppliers and U.S. importers which remaining effective for the domestic industry.
a. The break point of $150 per garment is excessive.
b. The 25 percent ad valorem tariff increase in the first year is prohibitive: it would force foreign manufacturers out of the market and would drive up prices in the United States to the point of virtually complete consumer resistance.
4. American workers would probably benefit only minimally from import relief because domestic manufacturers would be likely to establish border operations under TSUS 807 rather than expand within the United States.
5. The decline in imports which was evident at the time of the ITC hearings has accelerated in the intervening months. Currently, aggregate leatherwear imports are 35 percent below 1979 levels, and industry expectations are that this decline will accelerate further in the forthcoming months.
6. The current decline in leatherwear imports is already hurting the U.S. tanning industry, which is the chief supplier of the leather used by the major exporting countries. The prohibitive relief recommended by the ITC would severely hurt the domestic tanners.
The following analysis explains in detail why the President's decision is economically sound and proper and sets forth the inadequacies in the ITC's analysis.
II. THE ITC ERRED IN RECOMMENDING IMPORT RELIEF A. The ITC's definition of the domestic industry improperly ignored the distinction
between grain leather and split cowhide garments The ITC's definition of the domestic industry is coextensive with the tariff schedule items as to which relief was recommended: producers of leather coats and jackets. Leather Wearing Apparel, Report to the President on Investigation No. TA201-40, U.S.I.T.C. Pub. No. 1036, at 6 (1980) (hereinafter, “ITC Report”). That definition masks the distinction, of prime importance to the industry, between grain leather and splits.
The record before the ITC establishes that the U.S. market for grain (smooth) leather garments has historically been an import market, with only a modest level of domestic production. Grain leather garments are generally medium to high priced, have a high labor and materials component, and embody high-fashion fastturnover design. This market was created by importers, who, working with foreign manufacturers and U.S. tanners, developed medium-priced leathers that enabled these goods to reach a mass market. See Transcript of ITC Hearings (hereinafter, “Tr.”) at 428–29, 440-42; 233; 200-01.
The split cowhide business, on the other hand, is an indigenous American industry. Its product is more likely to be low priced, with a modest labor and materials component and stable design. Producers of split cowhide garments are able to utilize long production runs and high technology to maintain low prices.
These distinctions were repeatedly made by witnesses for both sides before the ITC. Morton Cooper, testifying for the domestic industry, stated: “There are different type of leather garments. The lowest price leather garment is a split leather garment ... they go up the line and have some short grain leather garments.” (Tr. 234-35.)
Jeff Wilson, testifying on the import side, made the point as follows: “I think that if you were to characterize leather, budget [i.e., low price] leather would be split cowhide, and popular [i.e., medium price] price leather would be smooth cow, or lamb skin.” (Tr. 442.)
In fact, petitioner's witness Peter Mummolo explicitly testified that fashionwear grain leather garments do not compete with split leather garments:
"Mr. SIMON. Do you consider that sort of high fashion leather apparel to be competitive with you, if I may call it, your staple line of goods, your mass produced line of goods?
"Mr. MUMMOLO. Is it competitive?
The ITC investigation failed to consider this distinction between grain leather and split cowhide garments. Had the investigation proceeded along these lines, it would likely have found that the concentration of imports in grain leather garments and domestic products in splits would require a finding that imports were not the cause of any injury that may have been experienced by the domestic industry. B. The ITC's "statistics” for quantity of imports are unreliable and wrong
Customs statistics on imports of leather wearing apparel (TSUS items 791.7620 and 791.7640) are collected only on a value basis. For its remedy recommendation, the ITC decided to calculate the additional tariff needed to equalize prices between imports and domestic products. Having assumed that its own importers questionnaires were not representative, the ITC purported to ascertain the quantity of imports by a statistical sample of imports through the port of New York. Unfortunately, the ITC's quantity determination is simply wrong.
The ITC analyzed all 3,500 entries of leather apparel through the port of New York in the month of August for each year 1975–79. IC report at A-26, A-38. These entries, however, vastly understate average FOB prices for several reasons:
1. They include in leather coats and jackets patch work garments produced from leather scraps. Patch work garments made from scraps have virtually no material cost and are therefore much less expensive than more typical leather coats and jackets.
2. The New York sample included a significant number of combination leather/ knit textile garments which are sold as sweaters but classified by the U.S. Customs Service as leather wearing apparel. These garments are much less expensive than leather coats and jackets.
3. The New York sample included a substantial number of leather garments shells imported from Latin America. These unfinished products, which are finished in the United States, bear FOB values substantially lower than those of finished coats and jackets.
As a result of these factors, the ITC New York sample understated the average FOB price of imported leather coats and jackets by some 31 percent. (See Brief Submitted to the USTR by Sharretts, Paley, Carter and Blauvelt.)
Having overstated the quantity of imports, the ITC also understated their unit values, by a commensurate amount. This error, in turn, led the Commission to overstate the amount of relief needed to equalize prices between domestic and imported products.
The ITC further overstated the amount of relief needed to equalize prices by understating the importer's mark-up on leather wear. The ITC recommendation purports to use a 30 percent mark-up on cost (ITC Report at 15). The ITC staff report appears to use a mark-up of 20 percent on cost (id. at A-38). Unfortunately, however, the ITC questionnaire which was sent to importers did not even attempt to elicit importer mark-ups. The only statements on the record concerning the importer's mark-ups are (1) the testimony of Mr. Nehmer, on behalf of the domestic industry, which was proved on cross-examination to be unreliable (Tr. 104 and (2) the testimony of exporter Mr. John Chee (Tr. 419-21), which was not questioned by either the petitioner or the Commission. Mr. Chee's testimony was that a importer normally works on 50 percent above landed cost.
Simple addition of these two fundamental ITC errors-unit value and mark-upindicates that the ITC figures used for price equalization purposes are some 50 percent below the actual unit value of imports in the United States.
Consequently, the relief recommendation based upon these erroneous assumptions is more than twice the relief needed by the domestic industry to compete fairly, assuming the domestic industry needs relief in the first place. The ITC recommendations therefore grossly contravenes the least-restrictive alternatives principle underlying U.S. trade laws and the GATT. C. The ITC injury determination is not supported by and adequate statistical base
The ITC's findings of injury are predicated on responses of firms employing only slightly over one-third of the total domestic leatherware manufacturing work force, and shipping only slightly more than 50 percent of the total value of industry shipments. In 1978, the total value of shipments of leather and sheep lined clothing in the United States amounted to $280 million (1979 U.S. Industrial Outlook at 400); companies responding to the ITC questionnaire shipped only slightly more than 50 percent of the total industry shipments ($154 million; ITC Report at A-15). Total industry employment in 1978 was 9,000 persons (1979 U.S. industrial Outlook at 400); firms reporting to the ITC employed slightly over one-third of these persons (3,388 in 1978; ITC Report at A-18).
Thus the ITC injury finding is predicated, at most, on only half the industry. In other words, half the domestic industry did not even take the time to respond the the ITC questionnaire.
In view of this questionable data base and recalcitrance on the part of the industry, it is submitted that the ITC injury finding is highly questionable. D. Until 1979, the domestic industry was relatively stable; the injury in 1979 was
caused, not by imports, but by the increase in the cost of leather Between 1975 and 1978, the value of domestic shipments increased from $143 million to $154 million (ITC Report at A-15); average unit value of domestic production increased by seven percent per year, from $56.86 to $69.82 (id.); domestic employment increased from 3164 production employees in 1975 to 3388 in 1978; man hours worked annually increased from 5.3 million in 1975 to 5.7 million in 1978; and average work hours per week increased modestly from 33.6 in 1975 to 33.7 in 1978 (id. at A-18).
These statistics generally portray a stable industry with relatively flat production and employment.
However, in the first eight months of 1979, hide and leather prices escalated by 61.3 percent (statistical tables prepared for use in the ITC hearing of November 6, 1979, table 13). As a direct result, domestic shipments in 1979 declined by 12.8 percent by quantity and by 2.6 percent by value, while unit values increased by 11.8 percent from $66.69 to $74.56 (ITC Report at A-15).
That the causal factor in this decline was not imports is evident because imports as a percentage of consumption actually declined in the first eight months of 1979, from 81 percent in January-August 1978 to 79 percent in January-August 1979 (id. at A-25).
Clearly, it is raw material cost which caused the injury in 1979, not only to the domestic industry but to exporters as well.