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-up— indicates 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.

III. THE RELIEF RECOMMENDED BY THE ITC IS EXCESSIVE

A. The ITC relief recommendation contravenes GATT and U.S. trade laws

The Trade Act of 1974 clearly requires that relief be limited to the least restrictive alternative.

to

Section 203 of the Trade Act of 1974 provides that the President shall provide import relief "to the extent and for such time. as he deems necessary prevent or remedy serious injury" to the domestic industry. The phrase "to the extent is a phrase of limitation: the relief should not exceed the extent necessary for remedying the injury to which it is directed.

The Senate report on the Act expresses the intent of the Senate that the remedy not be excessive: "[W]hile the President has flexibility in determining the remedy he must impose, the Committee feels that the remedy should be commensurate with the injury found by the Commission." Senate Report No. 96-1298, 93rd Cong., 2d Sess. at 126 (1974).

The historical materials of the GATT also support the principles that relief should be in the form of the least restrictive alternative: “Any suspension, withdrawal or modification [under an escape clause action] . . . should avoid, to the fullest extent possible, injury to other supplying member countries." Havana Charter interpretive note ad article 40.

In short, no more relief should be given than that which is needed to remedy the injury. The excessive remedy recommended herein-as will show below-is therefore in contravention of GATT and U.S. trade law principles.

B. The break point recommended by the ITC is excessive

The $150 price break point, above which relief would not apply, is much higher than is needed by the domestic industry. Testimony before the ITC on the domestic side clearly established that it is only low cost imports, if any, that cause injury to the domestic industry (Tr. 201). Nevertheless, the ITC included 99.5 percent of all imports in the category to which relief would apply.

C. The 25-percent tariff increase is excessive

The ITC's 25 percent tariff recommendation would raise prices so abruptly as to destroy the U.S. leatherwear market, forcing consumers to substitute other forms of consumption for leatherwear. By doing so, it would cause undue injury to our trading partners.

As Table 1 demonstrates, a 25 percent increase in unit price at the FOB level may be expected to cause about a 24 percent decrease in unit sales. Between 1978 and 1979, the global average unit value of leatherwear imports increased by 27.2 percent, accompanied by a decline in unit imports of 24.9 percent. Similarly, in that period unit values from Taiwan increased by 37.5 percent, while unit imports fell by 24.9 percent, and unit values from Korea increased by 28.5 percent, while imports from Korea fell by 19.5 percent.

TABLE 1.-INCREASE IN UNIT VALUE AND DECREASE IN QUANTITY OF IMPORTS, JANUARY-AUGUST 1978 VERSUS JANUARY-AUGUST 1979

Clearly, the elasticity of demand would cause consumption of leather wearing apparel to fall drastically under the ITC's tariff recommendation, injuring the domestic industry as well as importers.

IV. EVEN IF IMPLEMENTED, RELIEF WILL NOT ENABLE THE DOMESTIC INDUSTRY TO ADJUST TO IMPORT COMPETITION

The leather wearing apparel industry is labor intensive and materials intensive. In 1977, for example, the cost of materials was 56.9 percent of the value of ship

ments (1977 Census of Manufacturers). In 1979, when the cost of raw materials increased by over 60 percent (supra), the cost of materials as a percentage of the value of shipments must have increased commensurately.

Clearly, import relief would not make leatherwear any less materials intensive. In fact, as is shown below, the injury which will be experienced by the American tanning industry if leatherwear imports become prohibitive will increase the cost of leather to the domestic apparel industry if relief is implemented.

Moreover, it is clear that the labor component in grain leather garments could not be significantly reduced, even if import relief were implemented. For fashion leatherwear, each piece of leather in each garment must be cut individually; leather for fashion garments cannot be cut on a batch basis. Moreover, the heavy duty sewing machines used in leatherwear production are required to operate at lower speeds than those used, for example, in textile apparel production (Tr. 69, 71, 92, 422).

Thus, import relief will not make the U.S. industry less labor intensive or less materials intensive. Automation for a few large manufacturers of staple split cowhide garments may decrease labor cost somewhat, but this will not help the small producers of fashion garments.

In short, a tariff increase may provide a windfall, but it will not provide a remedy. It will create an import-relief addict and not a healthy industry.

V. IF RELIEF IS IMPLEMENTED, DOMESTIC MANUFACTURERS WILL TAKE ADVANTAGE OF TSUS 807 OPERATIONS RATHER THAN EXPAND DOMESTIC PRODUCTION

As can be seen from Table 2, the domestic industry has only just begun to utilize TSUS 807 cut-and-sew operations. However, its use of foreign operations is increasing substantially.

TABLE 2.-LEATHERWEAR IMPORTS UNDER TSUS ITEM 807, AT 6-MONTH INTERVALS IN 1978-79 AND MONTHLY IN 1980

If relief is implemented, domestic manufacturers will take advantage of the skilled, cheap labor in Mexico, the Dominican Republic and similar places under the provision of TSUS 807. While this might enhance the domestic industry's profitability, it will obviously do nothing for the domestic work force and nothing for domestic capital investment.

V. THE CONTINUING, PRECIPTOUS DECLINE OF IMPORTS OBVIATES THE NEED FOR IMPORT RELIEF

The ITC Report uses import data current through August 1979. Those data show that during 1979 imports were declining.

Table 3 herein shows how precipitous that decline was in 1979. Between 1978 and 1979, total imports of leather wearing apparel decreased by 18.8 percent from $293 million to $238.5 million. In view of the over 60 percent increase in raw materials cost, it is clear that the decline in the quantity of imports in 1979 must have been even greater than the decline in their value.

Looking at the separate categories of men's apparel and women's apparel in Table 3, it is clear that the greatest decline was in women's apparel. Between 1978 and 1979, imports of men's apparel increased by 13.2 percent, while imports of women's

apparel decreased by 44 percent. However, Table 4 indicates that men's apparel is now going the same way as women's apparel: down.

TABLE 3.-ANNUAL IMPORTS OF LEATHERWEAR BY VALUE, 1975-79

TABLE 4.-IMPORTS OF LEATHERWEAR BY VALUE IN THE 1ST 6 MONTHS OF 1978, 1979, AND 1980

In the first six months of 1980, men's wear imports were off by 29 percent when compared with the same period of 1979. Women's wear imports for the same two periods declined by 42.5 percent, and the overall import level declined in the first six months of 1980 by 34.9 percent.

In view of this precipitous decline in import levels, the ITC's findings of fact concerning increased imports are clearly no longer tenable. In fact, imports are declining.

Discussions with members of the trade in the last few days have shown several reasons for the decline in imports:

1. The fad value of leatherwear has decreased, as consumers have become used to the concept of mass market fashion leatherwear.

2. The expense of leatherwear makes it a luxury item, and one which is easily given up in a recession.

3. When the 1979 raw materials price increases were passed along to consumers, consumers simply stopped purchasing leatherwear. After the market lost its momentum, buyers for retail stores turned to other types of mechandise, and the momentum has not been regained.

In short, the U.S. leatherwear market no longer resembles the market that was studied by the ITC in the latter half of 1979. For that reason, the import relief based on that study is no longer appropriate, if it ever was.

To impose a 25 percent tariff increase on imports that have declined by 35 percent in the past six months is economically irrational and contradictory to the stated purposes of the escape clause provisions.

VII. IMPORT RELIEF WOULD INJURE THE DOMESTIC TANNING INDUSTRY

The U.S. tanning industry is the primary supplier of garment leather to Taiwan and Korea. If leatherwear producers in those countries are effectively shut out of the U.S. market, the U.S. tanning industry will lose major customers. Moreover, those tanned leathers that would have gone to the Far East will not be absorbed by the domestic garment industry, for the following reason:

1. A 25 percent tariff increase will raise not only import prices but also domestic prices, since domestic producers will attempt to improve profits.

2. Demand elasticity will lower consumer purchases of all leatherwear, domestic and foreign, as prices escalate.

3. As demand and sales drop, and as foreign sellers drop out of the U.S. market, retail stores will find sources diminishing in number. This, in turn, will deprive the fashion market place of the wide variety of available goods it needs in order to thrive.

4. Thus higher prices will result in an overall constriction of the market, and tanners will not be able to replace lost export sales with domestic sales.

Tanning Council statistics, although not complete, indicate the importance of export sales of garment leather. In 1979, domestic production of cattlehide glove and garment leather was 72.2 million square feet. Of that, 33.4 million square feet (46 percent) were exported. Of those exports, Taiwan and Korea bought 16.7 million square feet, or 50 percent of all exports. In other words, in 1979 Taiwan and Korea bought 23 percent of all the cattlehide glove and garment leather produced in the United States. (Source: U.S. Leather Industry Statistics, 1980 edition, Tanners' Council of America.)

These figures, of course, do not include the significant purchases by foreign producers garment-grade sheep and lamb leathers tanned in the United States. In 1979, exports of such leathers to Taiwan and Korea amounted to 2.5 million square feet. (There are no public domestic production figures for these leathers.)

In 1979, U.S. exports of cattlehide and sheep and lamb glove and garment leather to Taiwan and Korea were valued at $21 million. We submit that this is simply too much leather to be absorbed by the domestic garment industry, and too big an export product to forego on the speculation that the domestic industry may be able to survive the constriction of demand that would accompany import relief herein.

VIII. CONCLUSIONS

In discussions with members of the Trade Policy Staff Committee during the President's consideration of this investigation, it became clear that Executive personnel as well as ourselves-were seriously hampered by the failure of the ITC to provide an adequate statistical base for its recommendation and to calculate the elasticity of demand for leather wearing apparel. These failings on the part of the ITC made its remedy recommendation mere guess work.

If the domestic industry was in fact injured, and if that injury was in fact caused by imports-both of which, we submit, are contrary to fact-then it would be proper to impose relief which equalized prices between imports and domestic product. To equalize prices, one needs to know the quantity of imports (so as to derive average unit values) and the mark-up at each stage of the distribution chain. The ITC simply failed to obtain adequate data, and its import relief recommendation images this failure.

We therefore urge the Senate Finance Committee to cast a negative vote on Senate Concurrent Resolution 108 on the grounds that the relief recommended by the ITC is not supported by the facts, is excessive, is not consonant with our international obligations, and is not in the national economic interest.

We urge the Committee to support the President's finding that relief would be inflationary and of only dubious benefit to the domestic industry.

Mr. GIBBONS. Thank you.

Mr. Frenzel?

Mr. FRENZEL. Thank you.