A Collection of Posts , Links, and Observations Previously Published in The AAB Blog With New Analysis Based On Latest Developments. Updated 10/31/2019
CHINA HAS MANEUVERED THE U.S. OUT OF SERIOUS CUSTOMS REVENUES BY MANIPULATING THE U.S. CUSTOMS "YARN FORWARD RULE". THE US HAS NEVER COLLECTED THE LOST REVENUE. NOW CHINA IS RETURNING SOME OF THE MANUFACTURING TO CHINESE BUILT PLANTS IN AMERICA.
Cotton Cargo and transport on the Mississippi (PD-)
Research by a team led by the Great Namazu, article edited by Namazu
Editor note 10/31/2019: China made its bid to become not only a world reserve currency , but the reserve currency displacing the U.S. At least as far as displacing the U.S. dollar as the world's preferred currency their 2015 effort failed.
Editors note 12/8/2015: This may be worth a revisit as China prepares to launch one of the world's reserve currencies and all of the negative effects that will have on the U.S. dollar.
BASED ON RESEARCH DONE IN DECEMBER OF 2016 IT APPEARS THAT IN THE FIVE YEARS SINCE ORIGINAL PUBLICATION OF THIS POST, CHINESE TEXTILE WORKER WAGES ROSE. IN THAT SAME TIME FRAME AMERICAN FINISHED PRODUCT COSTS DROPPED DUE TO TECHNOLOGICAL ADVANCES. THE US TEXTILE FINISHED PRODUCT INDUSTRY (AS OPPOSED TO YARN AND FILAMENT MANUFACTURE) WHICH WAS VIRTUALLY EXTINGUISHED IS NOW COMING BACK STRONG. FOREIGN INVESTMENT HAS BUILT NEW TEXTILE MILLS IN THE CAROLINAS AND GEORGIA. CHINA IS ONE OF THE INVESTORS FINDING THAT NEW AMERICAN PRODUCTION EFFICIENCY COMBINED WITH REDUCED SHIPPING COSTS MAKE AN AMERICAN MILL A PROFITABLE PLACE FROM WHICH TO SERVICE THE AMERICAN MARKET.
ORIGINAL TEXT UNEDITED WITH SOME UPDATING NOTES:
Message from the Great Namazu: Ahoy Bipeds! I know you are all in the quaint habit of covering your nearly hairless hides with textile products like shirts and skirts. Personally I've never understood the practice but if you wear cloths this article should be of as much interest to you as it should be to Customs officials, auditors of customs regulatory enforcement efforts, legislators, members of the textile industry worldwide, not to mention people like cotton farmers and the crews of barges, ships, and rail lines, and trucking industries that move the product. However if you don't work in any of the aforementioned industries and are a nudist you may want to skip down to the next post, unless you are just curious about how the clothed beings live.
TEXTILES AND AMERICAN HISTORY
You would think that as long as the United States has been growing, transporting, and selling cotton, and as old as the Garment District is in New York, or considering how long the textile mills of the Carolina's have been around that we would be pretty astute at regulating our textile trades. The problem is as old as America. Prior to the American Civil War northern textile manufacturers were adamant that southern cotton producers should be forced by federal law to sell to them or be forced to pay an export tariff. The cotton producing South of course preferred to sell to Great Britain at world prices which then were higher than what New England wanted to pay. It was largely this disagreement that led to the first mechanized war with its massive destruction of the South including the complete leveling of two cities Richmond and Atlanta and a scorched earth policy that frankly should have been considered a crime against humanity , except that it was committed by the victors.* Of course there was the matter of slavery which the Union started citing as a war cause about two years into it when they needed to assume the moral high ground before reducing their neighbors to ashes.*
Low labor costs are still a driving factor in the global textile industry battle for supremacy.* In that battle the U.S. was long ago knocked out of the ring by the Dragon, China. Roughly a century and half after leaving more than 50,000 war dead related to the issue of textile regulation the U.S. still doesn't know how to regulate textiles, or audit the effects of their regulations..Editor's Note: The labor costs gap has considerably closed in the last five to six years due to American technology shrinking the necessary labor force,and a rise in Chinese wages. Factoring in the additional savings in transport costs even the Chinese are starting to build factories in America to service the American Market. Despite the overall shrinkage in necessary labor for production, the recent recovery is far from jobless as will be demonstrated in other posts reprinted below.
*
NAMAZU EDITORIAL NOTE: These passages may seem a bit a biased toward the Southern cause in the American civil war. The post was prepared in winter so that means the research staff are the regular crew down in New Orleans where they are still a bit peeved about what they call "the War of Northern Aggression" or in the company of Yankees, "the late unpleasantness". I would have edited these passages out but found that while presented in a partisan argumentative style the assertions are basically factual and left like originally written give the reader some idea of the still lingering ill feelings generated over America's last great failure at effectively regulating textiles in the national interest.
Photo USDA: Cotton ranks with salt, clay, spices, and oil as a raw commodity that has had a profound effect on shipping and history. It is a product that wars have been fought over.
Like salt, clay, spices, and oil almost everybody has a use for it in their daily lives, unless you run around naked or clothed in furs and animal hides, or those uncomfortable synthetics largely a product of petroleum. (The most comfortable "synthetics" are usually a blend of cotton fibers and petroleum spun fibers). Really, unless you are reading this naked the odds are that you are wearing something containing cotton fibers right now.
The modern problem is that present day
(written in 2012) Congressional leaders and White House denizens seems to think that they have some obligation to share prosperity with the less fortunate world, and the world is full of dragons ready to snatch from the arms of the deserving, or at least the targeted arms of U.S. selected trading partners. One case in point is the importation of finished textiles such as sheets, shirts, pillow cases, sweaters, curtains, bolts of cloth, and similar woven , sewn, or knitted items. Past administrations and congresses of both parties in their rush to ship manufacturing jobs overseas, decided to throw a bone to the Carolinas, and New York City, the big losers in the exportation of textile manufacturing jobs. The bone is known to those astute in customs regulations as the "YARN FORWARD RULE"; part of the Customs Regulations
Rules of Origin
The Basics of the ROO (RULES OF ORIGIN)
"Determining the country of origin of a product is important for properly assessing tariffs, enforcing trade remedies (such as antidumping and countervailing duties) or quantitative restrictions (tariff quotas), and statistical purposes. Other commercial trade policies are also linked with origin determinations, such as country of origin labeling and government procurement regulations. Rules of origin (ROO) can be very simple, non controversial tools of international trade as long as all of the parts of a product are manufactured and assembled primarily in one country. However, when a finished product’s component parts originate in many countries—as is often the case in today’s global trading environment—determining origin can be a very complex, sometimes subjective, and time-consuming process. (Emphasis by AAB).U.S. Customs and Border Protection (CBP) is the agency responsible for determining country of origin using various ROO schemes. Non-preferential rules of origin are used to determine the origin of goods imported from countries with which the United States has most-favored-nation (MFN) status. Preferential rules are used to determine the eligibility of imported goods from certain U.S. free trade agreement (FTA) partners and certain developing country beneficiaries to receive duty-free or reduced tariff benefits under bilateral or regional FTAs and trade preference programs. Preferential rules of origin are generally specific to each FTA, or preference, meaning that they vary from agreement to agreement and preference to preference. " Source:Congressional Research Service Report : INTERNATIONAL TRADE RULES OF ORIGIN-Jones and Martin January 5, 2012
One of the most important features of a trade agreement is the rules of origin. With "leaky" rules of origin (ROO) any trade agreement becomes potentially global opening up the terms of the agreement to virtually any nation, not just those who originally inked the agreement. However, the complete exclusion from liberalized market access of any goods produced by non signatory nations turns a "free trade agreement" into a closed trading block. Trying to avoid both extremes requires not only superior legal draftsmanship in penning the ROO but also periodic audit and adjustment to assure the regulatory regime is performing as intended.
The "Yarn Forward Rule " was primarily intended to exclude certain textile producers without penalizing specific trading partners and to throw a bone to the sorry remnant of the once thriving U.S. textile industry. (Less "sorry" at this writing.) With "Yarn Forward" supposedly the remnant of the once large American labor force that historically made much of America's bed sheets, shirts, undergarments, towels etc. , and yes; that "All American" globally popular product, "Blue Jeans"; could at least hold on to the job of making yarn. Various favored trading partners who used U.S. made yarn were offered a variety of incentives. Depending on the nature of their relationship these incentives ranged from low to no import tariffs to the actual right to affix a "made in the U.S." label to some goods assembled in certain nations out of U.S. yarns. The drafters of the ROO really thought they had something. But the Dragon ate their lunch and the lunch of most of U.S. targeted beneficiaries.
.The Dragon, China, at the moment dominates the global textile market. (This hasn't changed, what has changed in recent years is the return of finished product textile manufacturing to the United states, some in Chinese owned but US based plants) However its not always obvious. Here is one example. Kenya has about a half dozen textile plants (in 2012) all exporting with diligence and fervor products at greatly reduced or no tariffs. Our intention was of course to benefit Kenya. But who really pockets the difference? Why the owners of the textile plants of course; they are all in China. The same products coming to us from China would owe comparatively heavy duties compared to Kenya. (This collection of posts contains no updated information on the situation in Kenya) We send yarn to certain nations favored by our trade agreements with the understanding that they may make the final assembly into say, table cloths and instead they send them to a plant in China with whom they have a separate duty free agreement. The table cloths are sent back and the nation we intended to benefit gets to affix a "made in the USA" label. Did our generosity that cost Americans in the Garment District of New York and mills in the Carolinas their jobs, produce more jobs for the targets of Federal foreign generosity?
We only had the resources to check a few nations in the textile supply chain to America but found that in each corner of the world where we checked, the Chinese actually owned a controlling interest in the majority of textile plants in nations benefiting from our "Yarn Forward" rule. ( Statement relates to the situation in2012/13. We have no updated information on global ownership percentages at this writing, we do not know how close to dominant China is relative to ownership in US plants.) What should we do?
- Don't panic if the American government does nothing, and given that they don't know what they are doing that might actually be best; China is about to be knocked from the top of a variety of manufacturing heaps. Remember that textiles began as an industry heavily dependent on slave labor and miserably paid factory workers. The industry left here as laws regulating working conditions improved. China is famous for the sweatshop and prison labor. In the "worker's paradise" there is no social security, or OSHA. But 3D printing technology is about to make the sweatshop expensive. The 3D printer is bringing all sorts of manufacturing back to points closer to the markets. This type of manufacturing produces no slag heaps of wasted material, reducing material costs, and requires a tiny fraction of the labor compared to the traditional production line. It requires less land. Clothing factories one day soon will be literally out in the cotton fields of the U.S. Deep South. ( By the way if you haven't driven in the country between Key West, Georgia and Montgomery, Alabama you probably haven't noticed that some of the cotton and soybean fields now contain automobile manufacturing plants. These plants have Japanese and Korean names but pay UAW level wages, just to fewer people, thanks to robotics.) The cotton gets to skip an ocean voyage as does the finished product. But the distributors can still sell it for what the market will allow, generally prices that were established on the Chinese sweatshop model. Now however cost are reduced and profit margins increase. Those few decent paying jobs in the 3D mill will be easy for the companies to support. (Looks like the Great Catfish actually predicted the emerging situation involving a revival of the industry here in the USA back when this post was first published-Johnas Presbyter, Editor in Chief)
- It would be nice if the United States would attempt to recoup from China the millions if not billions they owe in evaded customs duties. Some of what they did was simply the direct result of American ROO loopholes, there was nothing illegal about their benefits derived. However a great deal was and is the result of illegal and deceptive practices and violators should be prosecuted. If all else fails, if we can quantify the amount owed including being able to determine participation by state owned entities we can always refuse payment on some of our debts to China based on unpaid duties. But don't hold your breath, the first part of that correction requires a competent audit. The odds are not good that the American people will get one. The normal audit authority for the Customs service is the Office of Audit of the Inspector General of the Department of Homeland Security. The Inspector General actually answers to the Secretary of Homeland Security, so much for independence. How happy do you think the Secretary will be to prove that a customs service under the secretary's administration missed millions if not billions in revenues? More over the entire Inspector General's office is presently in disarray with reports of faked internal reports: (That was in 2013/14, nothing on going noted in December of 2016) Obama appointee candidates for top jobs in the Inspector General's Office have drawn Congressional fire and investigations. (In 2013-2014) The immediate past acting Inspector General (2013) Charles Edwards has been the subject of FBI investigations" . According to the National Mariners Association which has frequent contact with the DHS Inspector General's Office of audit the last actual subject matter expert with licensing, credentials , and work experience in actual customs activities retired in protest over a year and half ago (2012) So unless such an audit is assigned to the Government Accountability Office it is highly unlikely that anything actionable will be discovered.
- When 3D printing finally does its work don't listen to whoever is in the White House when it happens as he or she tries to take credit for the restoration of the American textile industry. Congress and the White House only create these issues, they never solve them, so don't listen to any party in Congress attempting to take credit. Commerce moves on, things happen.
- As always, I Namazu the great catfish, advise you to avoid voting for members of either party unless you are certain they are not on the payroll of the usual special interests.Vote for third party candidates and independents at every reasonable opportunity and then hold their feet to the fire. It's a lot of work being your own watchdog over government but it's a requirement of democracy overlooked for too long. Believe me I've seen enough history after 3,000 years to be able to assure you that the only alternative is to hang your political leaders from the lamp posts along Pennsylvania Avenue, and societies that have resorted to that have not fared well immediately afterwards. Usually after the over indulged thieves of the public treasury have been hanged, the man on the white horse appears; I never like any of them. So bipeds take charge while you still can. Americans wake up, your government is a total mess. English speaking bipeds wake up, you need to form a more perfect union especially a naval union ....today there be dragons and with the help of your politicians, they are eating your lunch. There is probably something similar to a yarn forward rule in every English speaking nation. America isn't the only place not making clothing anymore. Stop the Dragon or go naked.
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RELEVANT NOTES ON THE SITUATION IN THE WINTER OF 2016/17
The situation has changed since the above description of abuse of the "YARN FORWARD RULE" was written. The rule is still being abused by China and her partners in crime but the American textile industry has changed in the intervening years. Basically, the industry has stopped shrinking and is starting to grow, including in employment. The fundamental reason for this change is pretty much what "Namazu" articulated in the above post. American innovative production technology, combined with non union labor markets in the US South, and the reduced transportation costs of making things for the vast US market within the US have taken much of China's sweatshop advantage away. Textile manufacturing of finished products from clothing to table cloths is returning to the Carolinas and Georgia. Unfortunately this is not exactly the revival of the American industry as it existed before being destroyed by foolish Federal policies and deliberate Chinese actions. while the production facilities and jobs are returning to the US South, the owners are new, often foreign, some definitely Chinese. Since the first posting of Namazu's clarion call to investigate enforcement of the "Yarn Forward Rule" nothing of the sort that we know of has happened that has resulted in changes in the law or enforcement policy. No attempt has been made to collect the unpaid customs import duties owed us. Now the matter becomes more complicated and delicate. At a moment when China is starting to invest some of the funds they stole from us in the US creating jobs and taxpayers in areas where both are sorely needed, how do we collect what is owed without upsetting the apple cart? What is the optimum time in which to begin collection efforts? How can the Federal government which dropped the ball in the first place encourage the return of American ownership to this industry that is starting to take off once again? Some useful details in answering these questions are presented below.
According to the National Council of Textile Organizations' (NCTO) outgoing chairman Jeff Price addressing the 13th annual meeting of the NCTO ; "Between 1995 and 2009 , the industry suffered through a historic and heartbreaking contraction. The last six years however have been different, the US textile industry has rebounded. Now the challenge is both to sustain this impressive recovery and to find viable ways to generate a new era of growth."
Unfortunately this "Impressive recovery" is in US located production plants and new jobs of a new type, It most emphatically is not a recovery of previous levels of employment or levels of US ownership of US based production facilities. This "recovery" is the product, to a significant degree, of foreign investment in the US textile industry. Such investment became attractive once innovative technologies seriously reduced the need for large semi skilled labor forces. Once the ready availability of cheap labor was no longer a controlling factor in textile manufacture profits; lowered costs of transportation made it most economic to service the American market with plants based in the United States.
According to the NCTO in 2015 the value of U.S. man made fiber, filament, textile, and apparel shipments totaled an estimated $76 billion. This represents a 14% increase since 2009 the last year of the depressed industry. What the NCTO didn't tell the public in their last meeting was how close that 14% increase came to restoring the industry to its pre 1995 economic status adjusted for inflation. Caution must be observed when performing any analysis of the US textile industry based on NCTO published information. This organization is an industry advocate as noted in this quote from outgoing director Jeff Price speaking at the 13th annual convention:
"Moving on to policy, the textile sector is unique because changes in trade policy often can affect business with serious, unpredictable consequences. It is for this reason that the textile industry, and certainly NCTO, must engage in the Washington policy-making process; otherwise there is no working relationship with those who are shaping the government’s position on trade." Mr. Price also said: The council simply cannot allow parties that oppose the industry’s policy agenda to perpetuate the false notion that the industry is antiquated and noncompetitive.This would certainly be an expected position for any industrial advocacy group, but analyst must keep in mind that this is an industry with an impressive physical and cash imprint on American soil but also serious ownership participation by foreign nationals and foreign nation government owned enterprises. A forensic examination of the situation begs the questions;(1) Is NCTO interested or concerned at all in recovering US ownership of the industry? (2) Might NCTO be interested in preserving the status quo of the global industry preserving market share and profitability of the foreign owners of America's plants?
Analyst advising policy makers should provide information that will allow policy makers to determine if restoration of American ownership is an attainable and worthwhile goal. Also, with the Yarn Forward rules still in place how much is the continued manipulation of the provisions damaging the US industry? Below is an an illustration from the text version of the NCTO on employment 13th annual convention on employment in the US textile industry. Below that is a comparison with Bureau of Labor Statistics from 1996. The "resurgence" illustrated by the NCTO pie chart seems impressive, but the Bureau of Labor Statistics figure reveal that the growth is only impressive in comparison with recent years of drastic decline. What has been lost is astounding, and largely the result of astute manipulation of our own "Yarn Forward Rule" by Chinese interests.
NCTO'S RECENT PIE CHART ON US TEXTILE INDUSTRY EMPLOYMENT:
Here is a link to the online report by the NCTO: http://www.textileworld.com/textile-world/features/2016/05/2016-state-of-the-u-s-textile-industry/
The 2015 NCTO report indicates a total of 579,300 textile industry jobs including 116,300 in cotton farming and related industries. By contrast the Bureau of Labor Statistics in 1996 did not count cotton farming related jobs in their account of textile industry employment but broke their figures down as follows:
TEXTILE MILL PRODUCTS JOBS: 624,000
APPAREL MANUFACTURING: 643,000
See full Bureau of Labor Statistics report at: https://www.bls.gov/mlr/1997/08/art3full.pdf
The two figures above are just part of the employment figures for the year 1996. Clearly the NCTO must include cotton farming occupations in with textile industry employment to demonstrate a "resurgence" to even somewhat less than half the employment lost since the start of Chinese manipulation of the global textile industry and the promulgation of the US "Yarn Forward Rule and related statutes, treaties, and regulations. Roughly 650 textile plants closed in America between 1997 and 2009 draining thousands of jobs and depressing dozens of communities . The ongoing "resurgence in the "American"(located but largely foreign owned) hasn't restored even half of the loss.
CONCLUSIONS RELATIVE TO RESEARCH SO FAR:
1. Between 1997 and 2009 the US suffered catastrophic losses of employment in the domestic textile industry.
2. These losses were in large measure attributable at least in part to Chinese manipulation of the global textile industry including astute and probably illegal abuse of the US "Yarn Forward" rule and related regulations, treaties, statutes, and regulations.
3. Since at least 2009 the textile industry physically based in America has been experiencing a self described "resurgence" with new highly automated plant openings. However a goodly portion of this "resurgent textile industry" is US located but foreign owned.
4. It is highly unlikely that the new US textile industry regardless of foreign or domestic dominated ownership will ever achieve the employment levels of the industry in the early 1990s even if it succeeds in dominating the US domestic market and achieves something of an export market due to the high levels of labor saving automation in the newly evolving mills.
5. Regardless of ultimate total employment figures the "resurgent" US textile industry does not represent a jobless recovery but is in fact generating substantial living wage employment in regions sorely in need of such.
6. The United States has never recovered the revenues lost in unpaid and avoided penalties and tariffs at the height of the abuse of the "Yarn Forward Rule" by China and Certain trading partners.
ADDITIONAL RESEARCH NEEDED:
1. Pluses and Minuses of attempting to recoup "cheated" tariff and penalty revenues from China and her cooperative partner nations in the prior abuse of the "Yarn Forward Rule" including careful consideration of effects on the current resurgence in US textile industry production / employment, driven in considerable part by foreign, including Chinese investment.
2. The legal steps required to retire the "Yarn Forward" regulatory/treaty/ statutory regime, and the most politically astute route to do so in order to preserve the on going domestic industry resurgence and US chances at redevelopment of an export market.
ADDITIONAL SUGGESTED READING:
