U.S.-China Economic and Security Review Commission

January 30, 2004

Columbia, South Carolina Field Hearing

On behalf of Inman Mills and our 500 associates, I am pleased to have this opportunity to address this China Commission hearing on the effects of Chinese imports on South Carolina textile manufacturing.

Inman is a textile manufacturer and has been in business for over 100 years. We weave a wide variety of products for the home furnishing, industrial, and apparel markets. Our record year for both sales and profits was 1998. In 2001 we closed 2 plants and have been fighting a wave of imported fabrics and finished products ever since.

The Fruits of Flawed U.S. Trade Policy

The current U.S. trade policy is one that favors import maximization, especially from China. The United States will run a trade deficit of approximately $550 billion in 2003. That's just over $1 million per minute! The U.S. trade deficit with China alone will exceed $130 billion. The effects of this policy have been devastating to the U.S. manufacturing sector.

More than 2.5 million manufacturing jobs have disappeared since January 2001, including 323,000 jobs in the textile sector.

U.S. trade policy must be reformed immediately to slow the unprecedented surge of job-destroying imports and to stabilize the U.S. marketplace and thereby preserve the nearly 15 million domestic jobs supplied by U.S. manufacturers, including the 270,900 jobs in South Carolina.

The surge of low-priced Chinese imports has had a dramatic, adverse impact on South Carolina textile companies and their communities. South Carolina has lost 56,800 manufacturing jobs since January 2001. 21,600 of those job losses were in the textile and apparel sector. Over 800 of these were at Inman Mills.

The news only gets worse. South Carolina's precipitous drop in manufacturing employment has cast a pall over the state's entire economy. South Carolina has suffered net job loss for three years running and the state has a projected $350 million shortfall in its FY 2005 budget.

Clearly South Carolina's economic conditions are not good. The U.S. government needs to take several decisive steps to help South Carolina and its textile manufacturing industry.

A Six-Point Action Plan to Help Domestic Textile Manufacturers

First, the United States must acknowledge that its trade policy with China is flawed. The current so-called free trade regime is running up unsustainable trade deficits and unacceptable job losses.

Second, the United States needs to more fully and effectively use the special textile China safeguard.

For years the textile industry has operated under an arrangement negotiated by the U.S. government known as the Multi Fiber Arrangement (MFA). The MFA was adopted in response to the threat of the ability of two or three low-wage countries to capture almost all of the U.S. textile and apparel market. The MFA doled out U.S. textile and apparel quotas to nearly all low-wage countries in the world. The result was an unqualified success. Apparel industries took root in dozens of poor countries. Textile and apparel products are the leading exports in many of these countries and the industry employs tens of millions in the Third World. And last but not least, market share for U.S. manufacturers was preserved.

Despite the success of the MFA, the WTO Uruguay Road phased out all textile quotas after a ten-year phase-out period ending January 1, 2005. At the time the quota phase-out was negotiated, China was not a member of the WTO and the addition of countries with non-market to the WTO was not contemplated.

Despite its failure to convert to a market economy, China was admitted to the WTO on January 1, 2002. Moreover, China was not given a ten-year quota phase-out like the rest of the world but was allowed to join the phase-out in progress. This meant China received significant quota-free access to the U.S. market immediately upon its admittance into the WTO.

In return for immediate quota-free access, the China gave the United States the right to use a "safeguard" to place quantitative limits on imports of Chinese textile and apparel products if those imports were disrupting the U.S. market.

While the trade off sounds great in theory, the reality has been an unmitigated disaster for the U.S. textile industry. The U.S. government has failed to implement the safeguard in a timely and effective manner.

The textile safeguard was designed to protect U.S. textile manufacturers and workers from a rapid and disruptive increase of low-cost Chinese textile imports and was first negotiated as part of the Chinese/U.S. textile agreement in 1997. The China safeguard was reaffirmed as part of China's World Trade Organization (WTO) accession agreement in 2001.

Although this safeguard was first agreed to six years ago and although China joined the WTO on January 1, 2002, the U.S. government did not publish procedures to implement the safeguard until late May 2003. The U.S. domestic textile industry had asked that the special textile safeguard mechanism be invoked against surges in several specific textile categories in early 2002, but the answer was always wait until the procedures were published.

The U.S. textile industry filed its first safeguard provisions in July 2003. To the credit of the U.S. government, three safeguard petitions were approved in November 2003. Nevertheless, the inexcusable delay on the part of the U.S. government has already resulted in enormous damage to the U.S. textile industry and its workers. China's exports to the United States grew by 340 percent between January 2002 and November 2003. Meanwhile, the U.S. textile and apparel industries continued to lose tens of thousands of jobs.

Comprehensive implementation of the special textile China safeguard will take on even greater importance in 2004. Quotas on all categories especially sensitive to U.S. textile manufacturers expire on January 1, 2005. If the special textile China safeguard is not implemented in a comprehensive fashion, China is expected to capture 70 to 75 of the entire U.S. textile and apparel market within two to three years! China is also expected to capture 45 percent of the world market.

China will wreak havoc on the economies of dozens of both least developed and First World countries if allowed to export unchecked. BusinessWeek reports that an estimated 30 million textile and apparel workers worldwide, including 630,000 in the United States, will lose their jobs to China's textile and apparel exporting machine.

Third, in light of the impending world-wide calamity alluded to above, the United States should attempt to convene an emergency session of the WTO governing body to extend all current textile quotas through January 1, 2008. This would give the WTO time to study whether phasing out textile quotas is in the best interest of the world's least developed countries.

Fourth, the United States must stop negotiating free trade agreements like the Central American Free Trade Agreement that grant the Chinese textile industry enormous loopholes to exploit at the expense of the U.S. textile industry.

For example, the U.S. government included loopholes in CAFTA that will likely lead to the loss of 500 to 700 million square meters of U.S. textile production. One loophole is "single transformation," an exception to the rule of origin that allows for Chinese-made components to be used in the assembly of an unlimited amount of brassieres, boxers and pajamas in CAFTA countries and then be exported to the U.S. duty free. This loophole will almost certainly most all domestic manufacturing of the textile components for these sensitive products.

As you recall, the U.S. government approved a special textile safeguard petition on brassieres because Chinese imports were disrupting the market. Yet with the stroke of a pen only a month later, the United States included a loophole in CAFTA that consigns nearly the entire brassiere-component manufacturing market to China.

Another loophole is tariff preference levels (TPLs). TPLs are an exception to the rule of origin allowing for a specific amount of trade to receive duty free treatment without having to use U.S. or regional yarns and fabrics. Under a TPL scheme, Chinese yarns and fabrics are shipped to Central America, cut and sewn into garments and then exported to the U.S. duty free. CAFTA includes a TPL for Nicaragua of 100 million square meters of production.

TPL's take away U.S jobs because U.S. industry they give incentives for Central American apparel manufacturers to send vital yarn and fabric orders to China and other Far Eastern suppliers at the expense of their American counterparts. China, which was not even a party to CAFTA and gave nothing up, receives all the benefits from the loophole. Finally, TPLs are unnecessary because "short supply" provisions in the agreement allow CAFTA countries to use Asian yarns and fabrics if those components are no longer produced in the U.S.

It should be noted that other third-party countries may also exploit the loopholes discussed above. That being said, China will reap the loin's share of the benefits.

Fifth, the United States should enhance and extend federal buy-American purchase requirements. Current Defense department buy-American requirements should be revised to eliminate waiver authority for inappropriate and arbitrary reasons. Moreover, buy-American provisions should be extended to other national security agencies such as the Department of Homeland Security. The measures would help ensure the health of the U.S. textile industry.

The U.S. textile industry manufactures such essential products as camouflage uniforms, Kevlar body armor, polar jackets, waterproof and insect-repellant fabrics, etc. In addition, U.S. researchers at the Massachusetts Institute of Technology are developing military apparel with nanotechnology that would be lightweight, bulletproof and waterproof. This technology could save innumerable lives in a time of war. The importance of the textile industry research and development capability cannot be understated. If the United States loses its textile industry, it will be losing a critical military research and development capability too.

Sixth, Congress should pass a Foreign Sales Corporations/ Extraterritorial Taxation Initiative (FSC-ETI) reform bill that focuses tax relief much more on domestic manufacturing, rather than continuing to provide large tax incentives for outsourcing corporations.

In 2001, the current FSC/ETI law giving tax credits to U.S. corporations for their offshore activities was deemed illegal by the WTO. The European Union has threatened to impose tariffs on U.S. imports unless the FSC tax breaks are removed. Legislation advocated by the House Ways and Means Committee would divide tax benefits between domestic manufacturers and outsourcing companies and overseas investors. Congress should instead direct much more of this benefit to domestic manufacturers. Moreover, benefits of the legislation should be extended to Subchapter S corporations as in the Senate bill. This tax relief would help U.S. manufacturers compete with heavily subsidized Chinese manufacturers.

Conclusion

Clearly it is time for action. U.S. textile and apparel manufacturers do not need any more promises, commitments or hollow announcements. What the industry needs are results. And results only will occur when the U.S. government actually implements the policy tools mentioned in this written_testimonies to keep Chinese exports from totally undermining U.S. manufacturers of textiles and apparel. With the elimination of textile quotas looming on the immediate horizon, it is imperative that the United States confront the Chinese threat to U.S. textile and apparel manufacturing forcefully and effectively.

Hopefully, such action will come in time to save the nearly one million textile and apparel jobs that are still left in this country.

Norman Chapman,

President & COO

Inman Mills

Inman, South Carolina