WORLD TRADE G/L/95/Add.1
15October 1996
ORGANIZATION(96-4266)
Original: English Council forTrade inGoods
15October 1996
ISSUES CONCERNING MARKET ACCESS AND CIRCUMVENTION
ASTHEY RELATE TOTHE IMPLEMENTATION OF
THE AGREEMENT ONTEXTILES AND CLOTHING
Addendum
Thefollowing communication1,dated 19September 1996, hasbeenreceived fromtheUnited
States.
_________________
Asstated bytheUnited States initscommunication totheCouncil forTrade inGoods (CTG)
dated 17July1996, there aretwoareas ofbroad concern totheUnited States involving progress on
theimplementation oftheAgreement onTextiles andClothing (ATC). Specifically, theUnited States
hasconcerns about thelackofcompliance bysome WTO Members intheircommitments onmarket
access; andcircumvention oftheATC, inparticular through transshipment.
I. MARKET ACCESS
1. Members haveagreed intheATC that"aspartoftheintegration process andwithreference
tothespecific commitments undertaken byMembers asaresult oftheUruguay Round, allMembers
shalltakeactions asmaybenecessary toabide byGATT 1994 rules anddisciplines soasto:(a)
achieve improved access tomarkets fortextile andclothing products...".
2. President Clinton made acommitment totheUnited States Congress that"ourwillingness to
phaseout theMFA belinked directly totheachievement ofeffective market access inindividual countries
byremoval ofnon-tariff barriers andlowering oftariffs". TheUnited States continues tosupport the
President 'scommitment andwould liketohighlight various areas where improvements arenecessary.
A. Exporting Country Compliance:
3. TheUnited States remains concerned thatexporting countries arefalling short ofcompliance
intheareaoftariff barriers andnon-tariff barriers.
1Thiscommunication wascirculated informally attheCouncil forTrade inGoods meeting of
19September 1996.G/L/95/Add.1
Page2
4. Regarding tariffbarriers, some possibly WTO inconsistent, theUnited States hashaditsmarket
access inthirdcountries significantly impaired bysuchbarriers which include thefollowing:
- oneMember, which hasoneoftheworld 'sfastest growing economies andabalance ofpayments
surplus ontheorder of$4billion, increased tariffs on64different textile andapparel products
by200-300 percent;
- another major exporting Member hasintroduced "additional duties" ontopofexisting duties
of65percent, inthetextile andclothing sector; and
- certain other Members havebegun touseselective andarbitrary minimum pricing valuations,
inaddition totheuseofminimum specific duties.
5. Non-tariff measures taken byMembers arealsodisincentives toUnited States exporters seeking
access inMember country markets. Forexample:
- aMember continues touseadiscretionary import licensing regime forimports inthetextile
andclothing sector, under which licenses areissued onaprice basis tominimize competition
inthedomestic market; and
- another Member hasrecently established, without complying withthenotice andcomment
requirements oftheAgreement onTechnical Barriers toTrade, onerous labelling requirements
forimported textile andapparel products.
B. Assessment ofUSCompliance withtheATC inComparison
toother Members
(i) Product Integration
6. Theproduct integration commitments oftheATCaretointegrate inthreestages products which
amount todesignated percentages of1990imports involume terms, drawn fromthefourmajor product
groups: topsandyarns, fabrics, made upproducts, andclothing. Thechoice ofproducts hasbeen
lefttoeachimporting Member. Members which donotapply quantitative restrictions under Article 2,
butwhowishtoreserve theirrights toinvoke theArticle 6safeguard, aresubject totheintegration
commitment.
7. Inaddition totheintegration obligations which tookeffect 1January 1995, theUnited States,
inorder toprovide certainty tothetrading community, hasselected andpublished thelistsofproducts
thatwillbeintegrated inthesecond andthirdstage.
8. Initsreview ofthenotifications offirststageintegration commitments bythose Members who
wishtoreserve theirrights toinvoke thesafeguard mechanism, theUnited States notes thatproducts
thatareconsidered "sensitive" inthecontext ofthetrading community, havenot,byandlarge, been
notifiedbymostMembers.Inaddition,Membershaveintegratedproductsthatencompassentireproduct
groups thatwerenotimported intotheircountries inthereference period. Thefollowing chart isan
example ofthefirststageintegration ofselected exporting Members thatwehaveidentified, andshows
thepercentage oftheir1990 imports being integrated ineachofthefourmajor product groups:G/L/95/Add.1
Page3
Country Yarn Fabric Apparel Made-ups
A rawwool, cotton
yarn(520512,
520615), rayon,
various mmfyarns
14.81% ofits
imports in1990flax,jute,
polyester,
chenille, waftpile,
tufted (5805230)
1.52% ofits
imports in1990
(theATC
reference period)accessories, other
(6117.80,
6217.10) 0.01%
ofitsimports in
1990 (virtually no
imports occurred
during theATC
reference period)bedlinen
(6302.22) 0.0%
(Noimports
occurred during
theATC reference
period)
B wool tops
(5105.29) wool
yarn(5106.10)
mmfyarn
(5403.39, 540349)
mmftow&fibers
(5502, 5503.30)
16.35% ofits
imports during the
reference periodwoven fabric of
paper yarn(5311)
0.0% (Noimports
occurred during
theATC reference
period)knitted gloves &
mittens (6116.99)
0.0% (Noimports
occurred during
theATC reference
period)toilet &kitchen
linen ofother
(6302.99) 0.0%
(Noimports
occurred during
theATC reference
period)
C most yarnexcept
forcotton 16.0%
ofitsimports
during theATC
reference periodsilkfabric, wool
fabric (511220),
tullefabric
(580410) 0.0%
(Noimports
occurred during
theATC reference
period)wool raincoats
0.0% (Noimports
occurred during
theATC reference
period)wool floor
coverings 0.0%
(Noimports
occurred during
theATC reference
period)
D wool tops, flax
yarn, veg.yarn,
artificial filament
tow,fiberglass
0.3% ofits
imports during the
ATC reference
periodfiberglass 0.0%
(Noimports
occurred during
theATC reference
period)skisuits0.0% (No
imports occurred
during theATC
reference period)seatbelts, watch
straps, worn
clothing 27%of
itsimports during
theATC reference
period
E rawwool,
synthetic tow&
fibers 15%ofits
imports during the
ATC reference
periodjutefabrics 0.0%
(Noimports
occurred during
theATC reference
period)gloves, men's
overalls, corsets
0.23% ofits
imports during the
ATC reference
periodwadding,
blankets, bed
spreads 0.69% of
itsimports during
theATC reference
period
Thischart demonstrates thatmostexporting Members havenotintegrated anymeaningful or
sensitive products inthefabric, apparel ormade-ups groups.G/L/95/Add.1
Page4
(ii) Quota Growth Rate Acceleration
9. Inaddition toproduct integration commitments, theUnited States hasapplied progressively
increasing quota growth ratesrequired byArticle 2.13and2.18totheeligible quantitative restrictions
maintained under Article 2.1;these restrictions willbenefit fromthecontinued growth rateincreases
provided inArticle 2.14totheextent thattheyarenotintegrated infuture stages.
10. Incomparison tototalUnited States textiles imports in1995 ofmore than18billion square
meters equivalent, byyeartenoftheATCnormal quota growth willaddapproximately 6billion square
meters equivalent ofadditional access peryear. Also, accelerated growth willaddanestimated 4billion
square meters equivalent ofadditional access annually bytheendofthetransition period. Asaresult,
incertain product categories, itisestimated thatthequota growth rateaccelerators could result in
potential access totheUnited States market thatisgreater thanthecurrent sizeofthemarket, andseveral
times thelevelofUnited States domestic production.
(iii) Level ofOverall Access intotheUSCompared withAccess
intoSelected Exporting Countries
11. TheUnited States notes thatsome exporting Members havelarge consumer markets oftheir
owntowhich United States exporters seekaccess. Under theATC, these countries haveobtained
substantially greater access totheUnited States market, while increased access totheirownmarkets
hasnotbeencomparable. Forexample, theUnited States hasfound thatofthese Members withlarge
consumer markets:
- bytheendof1995, aMember wasshipping totheUnited States approximately 87times more
textiles thanitimported from theUnited States;
- in1995, aMember exported totheUnited States 56times more textiles andapparel thanit
imported from theUnited States; and
- bytheendof1995, aMember wasexporting 35times more textiles andapparel totheUnited
States asitimported from theUnited States.
12. TheUnited States notes thatexporting countries havecomplained that,while following the
letter oftheATC, inorder fortheUnited States toprovide more market access itshould accelerate
integration ofproducts under quota. Wealsonotethatwhile some exporting countries havefollowed
theletteroftheWTO tenyeartariffreduction commitment, perhaps exporting countries should consider
accelerating tariff reductions since onaverage theirtariffs arehigher thantheUnited States. While
hightariffs often prohibit imports, quotas allow certainty ofmarket access. Withgrowth ongrowth,
many Article 2.1products under quota willhaveevengreater access totheUSmarket.
II. TRANSSHIPMENT/CIRCUMVENTION
A. Scope oftheCircumvention Problem:
13. TheUnited States imports over$44billion oftextiles andapparel annually. Goods havebeen
documented asbeing imported from over180countries, territories, andentities. TheUnited States
hasnegotiated andmaintains quantitative restrictions ontheamount oftextile andapparel which can
beexported totheUnited States with46countries orterritories.
14. TheUnited States isoneofthelargest consumer markets fortextiles andapparel intheworld.
Because ofthelargeconsumer demand fortextiles andapparel intheUnited States andexcess productionG/L/95/Add.1
Page5
capacityinsomecountries,transshipmenthasbecomeaneconomicallyviableoption.Thistransshipment
results ingoods entering theUSmarket incircumvention ofquota agreements, andtherefore, inviolation
ofquotas maintained under theATC.
15. Inthepast,transshipment waseasier todetect. Exporters usedunsophisticated means tofalsify
thetruecountry oforigin. Suchmeans, which included labelchanges, alteration ofapparel forpurposes
ofmis-classification toevade quotas, andentrydocument alteration, wereoftendetected bytheCustoms
Service atborder ports ofentry. After numerous seizures byCustoms officials atports ofentry,
transshippers havemigrated tomore sophisticated means ofquota evasion.
16. Inrecent years, transshippers haveresorted totheoutright smuggling ofwearing apparel into
theUnited States. Imported textiles havebeendeclared asother commodities. Thesupporting entry
documentation,whichincludesinvoices,shippingdocuments,purchaseorders,etc.indicatecommodities
other thanapparel. However, uponextensive examination ofcontainers, hundreds ofcartons ofapparel
arefound tobesmuggled inviolation ofthebilateral textile agreements.
17. Transshipmentcannotbeeasilyidentifiedbysimplyexaminingthegarmentsortheaccompanying
shipping andentry documents. Requesting documentation showing production doesnotyieldresults,
sincesophisticated transshippers areabletofabricate anyrecords requested. Themosteffective method
todetermine production istohavetheability tovisitafactory andconfirm production capability.
18. Tracingdocumentationtoshowtheoriginatingcountrycanbedifficultwhenfictitiouscompanies
areshown ondocumentation usedtomake entry, orwhere legitimate companies names appear onfalse
invoices. Inthelatter instance, thecompany 'sname issimply usedbythetransshipper without the
knowledge ofthecompany. There havebeeninstances where United States Customs officials have
visited suchfirms onlytofindoutthatinstead ofwearing apparel thecompany ismanufacturing
electronics orisfabricating goldjewellery.
B. Taking Action Against Circumvention:
Measures Taken bytheUnited States:
19. Since1990,USCustomshasvisited68foreigncountriesandterritoriestoidentifytransshipment.
Over $600 million worth oftextile goods have been charged tothecorrect country oforigin, in
accordance withbilateral andmultilateral commitments andprocedures. Thisamount should beeven
greater, butinmany cases thetruecountry oforigin cannot beidentified because oflackofcomplete
documentation ofthelevelrequired byourinternational obligations.
20. TheUnited States hasbrought circumvention charges fourseparate times against oneexporting
Member. Thiscountry, alarge cotton-producing exporting Member, hasbeenfound tobeillegally
transshipping cotton fabric, bedsheets, andtowels. Inallfourofthese illegal transshipment schemes,
USCustoms officials havevisited thecountry oftrueorigin anditsfactories, aswellasthecountries
where thegoods were alleged tohavebeenproduced, andtheirfactories, inorder toprovide tothe
Member documentary evidence showing themovement ofgoods fromtruecountry oforigin through
thecountry oftransshipment totheUnited States.
21. TheUnited States hasprovided training andtechnical assistance forexporting countries toassist
intheprevention ofcircumvention andhasworked withexporting countries toautomate andstreamline
"visa", orexport authorization systems, which helptoeliminate fraudulent export documentation and
circumvention.
22. Theestablishment bytheUnited States ofan"assembly" based ruleoforigin forimported
apparelproductshelpedtoharmonizerequirementsamongthemajorimportingcountries,andtominimizeG/L/95/Add.1
Page6
confusionaboutoriginrequirementsinthemajormarkets.TheUnitedStateshasalsorecentlyestablished
newrequirements forimporters toensure andverify country oforigin oftheirgoods; andexpanded
penalties intheseareastoinclude penalties based onnegligence. Inaddition, newtransparency initiatives
havemade thetrading community intheUnited States andexporting countries aware ofcompanies
thathaveengaged inillegal circumvention.
23. Inaddition, under theUruguay Round theUnited States haspublished thenames ofthose
producers/manufacturers found tobeinvolved intransshipment. Thepublication provides notice to
importers thatiftheycontinue todobusiness withthese manufacturers/producers theyriskbeing
penalized fornotexercising "reasonable care" under theCustoms Modernization Actwhich isembodied
intheNorth American FreeTrade Agreement implementing legislation.
III. Focus oftheReview Exercise: Measures thatcould betaken byExporting Countries
24. Without effective actions byMembers tofulfiltheircommitment to"prevent, investigate, where
appropriate,takelegaland/oradministrativeactionagainstcircumventionpracticeswithintheirterritory",
andwithoutfullcooperationamongMembers,transshipmentwillbecomeevenmoredifficulttoeliminate.
25. AstheUnited States noted initscommunication of17July1996, "effective implementation
oftheATC depends onexporting countries adopting effective measures toprevent circumvention of
theAgreement". Inthecontext ofencouraging closer cooperation inthisarea,theUnited States offers
thesuggestions foraction ontheattached page.G/L/95/Add.1
Page7
Attachment:
Proactive Anti-Circumvention Measures
Circumventionoftheagreement,bytransshipping,providesnoeconomicbenefittothelegitimate
business entities ofthetextile industry.
Thefollowing aresuggested measures exporting countries canconsider toprevent the
circumvention oftheAgreement onTextiles andClothing:
- enactment ofdomestic legislation making transshipment oftextiles andapparel illegal, and
establishment ofcriminal andcivil penalties forfalsification oralteration ofexport
documentation;
- enactment oflegislation which requires theretention ofbusiness documents/records for3-5
years, illustrating theproduction/manufacturing ofthemerchandise inaddition totheentire
business transaction from rawmaterial procurement totheshipping offinished goods for
purposes ofauthenticating theproduction ofrestrained commodities. Records anddocuments
should include letters ofcredit, purchase orders, sewing andcutting tickets, employment records
etc.;
- creation ofprograms which would encourage thetextile industry tocome forward andreport
instances oftransshipment.
- conductofunannouncedproductionverificationvisitstoentitieswhichclaimtobemanufacturing
textiles andapparel. Inaddition tostopping transshipment, suchvisits goalongwayin
determiningtheaccuracyofindustrytradestatisticsandensuringcompliancewithotherCustoms
andtaxation laws;
- partnership withimporting countries toshare information andtechniques;
- establishment ofaborder inspection system which focuses onin-transit merchandise shipments.
Initiation orexpansion ofphysical inspection ofgoods andincreased scrutiny ofaccompanying
shipping documents. Establishment ofexport control measures which include examining
merchandise anddocuments upon export. Check forspecific details:
- neutral marking ofthecommodity (nocountry oforigin labelor"made in"labels);
- nolabels;
- distinctive national marks orsymbols oncartons, billsoflading, hangtags,including
sizesand"RN" numbers;
- ininstances where transshipment issuspected, provision ofinformation totheimporting country
soaction canbetaken before thegoods areentered intotheconsumer market. Ininstances
where transshipment isfound, seizure ofgoods;
- requirements thatthemanufacturer, who isreceiving thequota allocation, report all
subcontracting work (names andaddresses). Verification oftheproduction capability ofthe
subcontractors;G/L/95/Add.1
Page8
- examination andverification ofproduction intheforeign trade, orfreezones. Inthepast,
freetradezoneshaveofferedanexcellentopportunitytochangeshippingdocumentation,thereby
masking thetruecountry oforigin.