Matthew Schewel
Reporter, Inside U.S. Trade

U.S. Hosiery Makers Press USTR For Flexible Sock Rule Of Origin In TPP

Posted: September 11, 2012

LEESBURG, Va. -- U.S. manufacturers of socks and hosiery represented by The Hosiery Association (THA) this week made public their demand that the Obama administration revise its position in the Trans-Pacific Partnership (TPP) talks by tabling a rule of origin that would allow certain socks and hosiery made in the U.S. to qualify for TPP tariff benefits even if they use yarns from outside the TPP region.

In a one-page position paper handed out during a Sept. 9 stakeholder event at the 14th round of talks here, THA urged the Office of the U.S. Trade Representative to put forward what it calls a "knit to shape" rule for certain socks and hosiery products. This would mean that if the socks or hosiery are made into a final product in a TPP country, they would qualify for tariff benefits, regardless of where the yarn was produced, an industry source said.

This proposal would therefore allow U.S. hosiery makers to source acrylic, wool and elastomeric yarns from outside the TPP region and still obtain tariff benefits for the final socks and hosiery. The only exception to this proposed rule would be for yarns made of cotton and/or polyester, which would still be required to be made in the region in order for the final product to be eligible for TPP benefits, according to industry sources.

THA floated this proposal to USTR last week, but has not yet received a response, one source said. Overall, this proposal from THA would create a rule that is more flexible than the strict yarn-forward rule of origin that the U.S. has tabled in the TPP talks. A yarn-forward rule would require that all inputs, starting with the yarn, come from the TPP region in order for a final product to qualify for TPP benefits.

According to the THA paper, a more flexible rule is needed because the U.S. hosiery industry currently sources its yarns from all over the world. Therefore, if the TPP includes the strict yarn-forward rule, a majority of U.S. hosiery products would not be eligible for TPP tariff benefits.

Industry sources argued that this would impair the ability of U.S. hosiery makers to access new markets like Vietnam and Malaysia, which are expected to lower their tariffs for qualifying apparel items. One source pointed out that socks and hosiery are one of the few apparel items still produced in the U.S., and argued that the Obama administration should be promoting U.S. exports of these products instead of potentially impairing them.

The THA proposal is a direct response to the yarn-forward rule of origin for apparel that USTR has tabled in the TPP talks, which THA argues is even more restrictive than yarn-forward rules the U.S. has included in past free trade agreements. Unlike past U.S. FTAs, the U.S. yarn-forward proposal in TPP eliminates two major exceptions that had been widely used by U.S. sock and hosiery makers.

The first was for gimped yarn, a stretchy type of yarn used in hosiery, while the second was for nylon yarn from Israel. Under previous U.S. FTAs, U.S. sock and hosiery makers were able to source these two yarns from outside the region and still get FTA benefits, but they would not be able to do so under the current U.S. proposal in TPP.

When the U.S. hosiery industry realized it would not benefit from these exceptions in TPP, it took a closer look at its sourcing patterns and decided to make the broader demand for a knit-to-shape rule, according to industry sources.

Under the knit-to-shape rule proposed by THA, elastomeric, or stretchy yarns, would be among the yarns that could be sourced from outside the TPP region. In its paper, THA argued that it is especially important that this exception to the yarn-forward rule apply to elastomeric yarns in light of the fact that the number of U.S. elastomeric yarn producers is expected to dwindle to just one by the end of next month.

This one supplier would be insufficient to supply all of the industry's needs, meaning U.S. hosiery producers would have to rely on other sources and therefore not be eligible for TPP benefits, according to the THA paper.

Because it would allow yarns from outside the region, a knit-to-shape rule for socks and hosiery is similar to a cut-and-sew rule for apparel. But unlike most apparel, which requires yarn to be woven into fabric that is then cut and sewn into a final product, socks and hosiery are produced directly from yarn with no major intermediate steps, according to an industry source. This is why a cut-and-sew rule does not work for socks and hosiery.

Another reason THA rejects the U.S. yarn-forward proposal is because it does not consider the temporary short supply provision floated by USTR as part of its proposal to be a "viable solution." USTR has proposed identifying a short-supply list of specific textile inputs that are not made in the region. During a limited period -- perhaps three to five years after the TPP deal takes effect -- these inputs could be used to make apparel items that would still receive TPP tariff benefits (Inside U.S. Trade, May 25).

The goal of this provision is to give TPP countries such as Vietnam and Malaysia enough time to build up their own textile industries in order to be able to produce textile inputs that are in demand by TPP apparel makers but not currently made in the region.

But in its position paper, THA argued against this temporary short-supply approach for two reasons, the first being that it is predicated on the idea that the TPP region eventually would have the ability to supply all of the components needed by the industry. THA said this approach would limit the ability of U.S. sock and hosiery makers "to source the best product at the most competitive price, the two major reasons U.S. products are currently competitive on the world market."

Secondly, THA argued that the short-supply provision fails to address the innovative nature of market, given that socks and hosiery are becoming more technologically advanced as new types of yarns are invented. A temporary short supply list would only cover yarns that currently exist but not future ones, which would be required to originate in the TPP region.

"By its nature, a short supply provision cannot address future materials," THA said in the paper. "Subsequently, U.S. products would either not be able to use these new materials, or they would be disqualified from TPP preferential treatment." To illustrate the sheer scope of yarns used by U.S. sock and hosiery makers, an industry source said one U.S. company had responded to a USTR request to propose items for the TPP short supply list by providing roughly 5,000 specific types of yarn.

With respect to U.S. suppliers of elastomeric yarn, THA noted that U.S. producer Radici closed its doors in October 2011, and that another producer, Asahi Kasei/Dorlastan, is slated to follow suit next month. The group argued that a TPP yarn-forward rule that applies to elastomeric yarn would restrict U.S. sock and hosiery makers to sourcing from essentially one provider.

"Neither U.S. producers and importers, nor Congress, nor the administration would want to see that kind of monopolistic control of the industry," THA said. "Indeed, with the closing of these two U.S. elastomeric yarn producers, a rule requiring origination of elastomeric yarn becomes a potential 'earmark' for one U.S. company."