1998 Congressional Hearings
Special Weapons
Nuclear, Chemical, Biological and Missile



TESTIMONY OF CARLOS MOORE
EXECUTIVE VICE PRESIDENT
AMERICAN TEXTILE MANUFACTURERS INSTITUTE




BEFORE THE COMMITTEE ON COMMERCE
SUBCOMMITTEE ON TELECOMMUNICATIONS, TRADE AND CONSUMER
PROTECTION
RE: CHINA TRADE POLICY



MAY 14, 1998



Carlos Moore
Executive Vice President
1130 Connecticut Avenue, NW, # 1200
Washington, DC 20036
(202) 862-0500



Testimony of Carlos Moore
Executive Vice President
American Textile Manufacturers Institute

Before the Committee on Commerce
Subcommittee on Telecommunications, Trade and Consumer Protection
Re: China Trade Policy




Summary

China has consistently violated its textile agreement with the U.S. by illegally
transshipping billions of dollars of textiles and clothing to the U.S. The U.S.
government needs to increase its effectiveness in curbing China's activities by:

Simplifying its own requirements in developing a transshipment case;

Requiring China to cooperate with U.S. Customs authorities.

Instructing the U.S. Customs Service to share information regarding transshipments
with government agencies more quickly than it does, so that quota chargebacks can
be made more easily.

Measures for improved customs enforcement need to be made part of China's
commitments in its WTO accession package. Other vitally important elements in an
acceptable WTO accession package for China include:

A ten-year phaseout of China's textile and apparel quotas beginning the date of its
accession;

A sector-specific safeguard mechanism applying to textiles and apparel and existing
beyond the 10-year phaseout;

Effective access into China's market for textile and apparel products.
Mr. Chairman, members of the Committee B

My name is Carlos Moore and I am Executive Vice President of the American Textile
Manufacturers Institute (ATMI). ATMI is the national association of the domestic textile
industry. Our member companies operate in over 30 states and account for almost 80
percent of all textile fibers consumed by plants in the United States.

We would like to thank Chairman Tauzin for calling this hearing and allowing us to
testify about issues related to trade with China.

Background

First, I would like to offer some background information. World trade in textiles and
apparel has been governed since 1974 by the Arrangement Regarding International
Trade in Textiles (or, simply, the AMFA@) and by the successor Uruguay Round
Agreement on Textiles and Clothing, or the AATC@. The MFA was a departure from
GATT principles inasmuch as it permitted countries to negotiate bilaterally to set the
quantitative restraints or quotas on imports of textile and apparel products that were
disruptive or damaging or threatened to do damage to the markets of the country
importing the goods.

On January 1, 1995 the MFA was replaced by the WTO=s Agreement on Textiles and
Clothing, or ATC. In the new agreement, quotas applied to WTO members are being
increased significantly each year for 10 years and will disappear completely by 2005.
Countries that export textiles and are not WTO members will continue to face quotas on
their exports based on the textile agreements negotiated with the importing countries.

Currently, U.S. has 47 of these bilateral agreements that cover almost 70% percent of
U.S. textile and clothing imports. Under the terms of the ATC, the US government has
increased the quotas in these agreements by 32% percent since 1994 and actual
imports into the U.S. have grown by $14 billion since then. Last year they reached a
record of $54 billion, up $8.2 billion or 17 percent from 1996.

So, the evidence shows that while textile and clothing quotas cover a large percentage
of U.S. imports, they permit import growth that far exceeds the annual U.S. market
growth of about 1-2 percent. In fact, only a few countries completely fill their quotas
each year. But the quotas do provide a framework that prevents a few large textile and
clothing exporting countries from flooding our market with low-wage and often
subsidized goods and driving out U.S. and other producers, literally overnight. The
result has generally been orderly but continued increased in imports without abrupt
dislocations and damage to U.S. producers and workers.

Mr. Chairman, one might be expected to ask: what does all this have to do with China?
The answer is that the U.S. government has negotiated a series of textile agreements
with China that date back to 1980. These agreements set quotas on the amount of
textiles and clothing that China can export to the U.S. annually. The quotas negotiated
with China are the largest of any country=s and China=s legal shipments to the US now
account for more than one in every ten textile and clothing imports. In 1997, China
shipped $6 billion, up 23 percent from 1996, according to official U.S. government
statistics.

In fact China actually shipped much more than that B perhaps as much as $2-4 billion
more. China did this by filling nearly all of its quotas and then illegally transshipping
goods through other countries - - countries where the origin of the goods was then
changed to make it appear as if the goods were actually produced there. These
mislabeled goods were then sent to the U.S. as products of those third countries --
most often as of products of Hong Kong and Macao - - though 40 different countries
have been identified by US Customs as transshipment routes.

China=s action - - transshipping to avoid quota - - is a blatant violation of an
international agreement, of bilateral agreements entered into in good faith by the United
States, and is a violation of U.S. Customs law. It is flat wrong and it is illegal.

Chinese Transshipments

While other countries have been found to transship goods, the heart of the
transshipment problem lies with China and with the U.S. government=s response to
China. China was a relative latecomer to world textile and apparel trade - - it did not
achieve its current MFN status until 1979. Despite this fact, since 1979 Chinese textile
and clothing exports were permitted by the U.S. government to grow very quickly.
Within several years, China had leapfrogged the rest of our trading partners to become
the largest exporter of textiles and apparel to the United States. During the same
period of time, the US granted China market access which far exceeded those of other
nations. For example, regarding apparel, China today has total quota access of almost
1.5 billion square meters. To give you a sense of the size of this, if we were to convert
that into t-shirts, it would come out to 3 billion t-shirts being shipped to the US year in,
year out.

Despite this generous treatment, China almost immediately began to bend and then
break its bilateral commitment to abide by its quota levels. Dozens of different quotas
were routinely overshipped each year and transshipping schemes proliferated. As you
will see from the following timeline, the problem with China and transshipments has
been growing for almost 15 years.

In 1983, US Customs reported that Aconspiracies to circumvent import requirements
(for textiles and apparel) have now reached epidemic proportions.@

It estimated textile transshipments at $450 million.

In 1992, Customs Commissioner Carol Hallet estimated that Chinese transshipments to be "at
least $2 billion." US Customs also estimated that annual losses of duty to the US treasury
for Chinese transshipments could be as high as $300 million. Another Customs analysis
reported that of 694 factories inspected, 80% were found to be transshipping.

In 1993, Acting Commissioner Sam Banks testified to the extent of the problem. Citing an
investigation of countries which have been used as transshipment routes, he stated that "We
have gone into . . . 32 countries and in 27 we have found huge (transshipment) problems. We
can say straight-faced that the $2 billion figure is probably a conservative estimate." Also
that year, US Customs in Hong Kong concluded that transshipments might be as high as $4
billion.

In 1994, US Customs reported that China could not account for up to $10.8 billion in worldwide
apparel exports.

In 1997, US Customs jump teams in Macau and Hong Kong found transshipment rates of 20-25% or higher in all targeted apparel categories. Some categories in Macau were reported to
contain 90% transshipments.

Earlier this year, Hong Kong Customs, after an internal review of one third of its apparel
factories, determined that 20-25% were transshipping. If so, transshipments of goods out of
Hong Kong to the rest of the world could total as much as $2.4 billion.

Mr. Chairman, as this list shows, China exports have been and continue to be out of control. Of
the tens of billions of dollars worth of illegal merchandise which has been permitted to arrive in
the US over the last ten years, only a small percentage -- one to two percent -- has ever been
apprehended.

Even worse, the U.S. government seems to be making it even harder to catch transshippers.
Despite the fact that China is not a member of the World Trade Organization, our government
has been treating China as if it were already receiving full WTO rights and privileges with
respect to transshipments. As a result, our government requires that Customs, Commerce and
USTR jump through a series of higher and higher hoops before a transshipment case can be
presented to China and charges made against its quotas. The end result is that such a time-consuming and burdensome level of detail is now required to prove even the smallest of charges
that we are now developing fewer transshipment cases today than we have at any other time.

Let me cite an example. Earlier this month, USTR informed China that its quotas would be
reduced by an amount representing $1.5 million worth of transshipped product. In the scheme of
things, this was a relatively small figure, accounting for 1/25th of one percent of total imports
from China. And yet these charges were the culmination of many rounds of consultations with
the Chinese and several years of work on the part of Customs and Commerce employees.
Among the charges was a reduction to one of China's coat quotas - - also called a "chargeback" -
- of 54 coats that had been transshipped from China. Please note the size of that number - - 54
coats. No one, Mr. Chairman, ships commercially 54 units of clothing anywhere. For example,
just one of China's coat quotas totals 7,812,000 coats. The average size of an apparel order is in
the hundreds, or more often, in the thousands of dozens. But because of the ridiculous lengths
that the US government has imposed on itself to prove a transshipment case, only 54 coats could
be found to be transshipped.

It was not always like this. When the U.S. government was more concerned about
stopping transshipments and less concerned with appeasing China, hundreds of
thousands of transshipped garments were regularly "charged back" to China's quotas.
In fact, the US government was following established precedent - - China was treated
in the same way that US Customs treats US companies today. Today, if you are a US
company and Customs finds an irregularity in part of an export order, it requires that the
company prove that the rest of the order was correctly filled. If it cannot, Customs has
the power to penalize the entire order, and frequently does so.

Let me cite one more example. Two months ago, US Customs sent a team to Macau, a
small Portuguese territory near to Hong Kong. We have since learned that that team
found what they were looking for - - large scale transshipments in every category
investigated. They found factories that weren't producing, factories that said they were
shipping but did not even exist, factories that went out of business one day, then turned
up with a new name and new identity the next. A bonanza, you might think. But no.
Despite an overwhelming amount of evidence, we have also learned that it is likely that
not a single Chinese quota will be reduced.

The reason? Macau does not require that its manufacturers show where their goods come from.
Therefore, according to US government rules, despite the fact that you can stand and watch the
loads of transshipped goods arriving from China and being offloaded in Macau, and despite the
fact that it is widely known that Macau clearly cannot and does not produce much of what it
sends to the US, under self-imposed US procedures, the necessary amount of proof is still not
there.

And I need to reiterate - - this extraordinary level of evidence is something that the U.S.
government - - or perhaps one or two agencies of government - - has made up all on its
own. Such evidence is not required by US law; it is not required by the US-China
bilateral agreement. Under the agreement signed by the US and China, the US needs
to satisfy itself that the goods came from China. And, I ask whether anyone can have
any doubt in this particular case, with this tiny territory of just six square miles which sits
at the mouth of the Xi river in China, what the true source of those goods was.

Mr. Chairman, if this were only a story about the massive violation of a international
agreement, that would be bad enough. China, as we all know, is a large and growing
power in the world; the fact that it cannot be taken at its word in an agreement with the
US is very troubling. But this is also a story that hits closer to home. Last year, the US textile industry spent over $2.8 billion to modernize its new plants and
buy new equipment. During the last decade, this industry had one of the highest
reinvestment rates of any manufacturing sector. And it is consistently ranked as one of
the most efficient and productive in the world.

Despite these efforts, illegal transshipments, particularly on the scale we are talking
about here, take away billions of dollars in orders that might have gone to expanded US
production facilities that might have been spent in hiring additional US workers - -
workers in new mills that could be benefiting your districts or your states.

What is the answer?

First, the US government must take its gloves off where China is concerned. It must
make reasonable decisions, not outrageously complex determinations, in making
transshipment charges. In cases where a pattern of illegal transshipments has been
demonstrated, it must act quickly and effectively by imposing large scale chargebacks.
Meaningful penalties will be needed before China acts to stop this illegal activity.

Second, governments of countries (and China in particular) that enjoy access to the US
market must be required to cooperate fully with US Customs. They must be made to
require that their exporters keep records of where their inputs come from and that those
records be made available upon demand to US Customs. In addition, US Customs
must have the right to make unannounced plant visits in foreign countries which are
suspected of being transshippers.

Third, US Customs should investigate potential transshippers with the primary goal of
achieving quota chargebacks. Chargebacks are the most effective penalty available to
halting transshipments. We are not suggesting that U.S. Customs should not seek
legal actions against transshipments. We are saying that in those cases that do not
clearly implicate U.S. importers, Customs should share that information with the
interagency Committee to Implement Textile Agreements (CITA) so that China's quotas
can be reduced without undue delay. Customs needs to convey this information
promptly and then let CITA decide if more evidence is needed for the U.S. to seek
chargebacks under the terms of the bilateral agreement.

Implementing these changes would require the support of a number of government
agencies - - some of which currently appear unwilling to "rock the boat" and upset
China. But everyday that the work of Customs is stifled is another day in which a job
opportunity is lost for a US textile worker and an investment in added US textile
production is not made.

China and the WTO

Our recommended actions against China will work because China operates outside the
WTO. Because China does not have to adhere to WTO rules and disciplines, it
maintains barriers that keep out imports from its own market and engages in a host of
trade practices that violate the WTO, and, in many cases, U.S. trade law.

But China needs to be made to realize that non-WTO membership also carries some
costs. That is why we believe our government should move more forcefully to attack
China's transshipments.

China is currently negotiating with the US about the changes China must make to its
trade and economic regimes in order to become a WTO member. And, to reiterate, in
our view one critical change has to be that U.S. be allowed access to Chinese textile
and clothing facilities to verify production and exports. Other equally critical measures
need to be included in China's WTO accession commitments, including:

A ten-year phaseout of China's textile and apparel quotas beginning on the date of its
accession;

A sector-specific safeguard mechanism applying to textiles and apparel and existing
beyond the 10 year phaseout;

Effective access into China's market for textile and apparel products.

In addition, we share the concerns of many industries in the US concerning reform of
China's distribution system, national treatment, and the elimination of trading rights.

We have also shared our views about China's pending accession to the WTO with the
Office of the U.S. Trade Representative and the Department of Commerce, as well as
in earlier testimony before Congress.

Mr. Chairman, that concludes my testimony. If you have any questions, I would be
happy to answer them.

Thank you.