In 2015 Coleman Company Inc. filed a application for a foreign trade zone in which to import nylon and polyester woven fabric for use in the production of personal flotation devices. On February 24, 2016, the Foreign Trade Zone Board held a hearing on the application in Washington, D.C. The following comments were presented by David Trumbull, Principal, Agathon Associates.
COMMENTS
Thank you for this opportunity to address the Board regarding the Board regulations as they relate to Applications for authorization of FTZ procedures involving textiles. I am a consultant to the textile industry and my clients may be materially affected by Board determinations relating to textiles.
In the cover letter to the Application, which Coleman requests be considered an integral part its application (see page 10, footnote 11), Coleman makes a number of assertion to which I respond –
Coleman Assertion #1, The Need for Broader Production Authority (pages 3 and 4)
Coleman asserts it needs broader production authority due to the inverted tariff. In answer to Question 39 in the Application, Coleman asserts that relief from inverted tariff will account for 97-98% of the expected savings should the Application be approved.
Without doubt, tariffs, whether inverted or not, impose additional costs on domestic manufacturers who use foreign inputs. If Coleman believes its profitability can be enhanced by tariff avoidance, it has a remedy at hand that would not require Application to the Board and subverting the Harmonized Tariff Schedule of the United States as enacted by Congress. Coleman can avoid tariffs by purchasing domestically made textiles. The U.S. textile industry is able and willing to supply such fabrics. However,
Coleman has asserted as justification, "that the tariff inversion provides a disincentive to U.S. manufacturing. " I understand why, for Coleman, avoidance of tariff inversion is a motivation for the Application, and acknowledge that tariff inversion may be a consideration in the Board's determination. However, tariff inversion ought not to be, nor has been, sufficient to compel a positive Board determination.
(a) Policy.
I believe the Board must be very cautious in granting authority in a case where duty inversion is a major component. The U.S. tariff schedule has thousands of lines in the textile and apparel chapters alone. In isolation the rationale for some particular provision, such as a tariff inversion, may be difficult to ascertain, but each of those tariffs was arrived at through a legislative "give-and-take" process of tens of thousands of compromises that resulted in Congress adopting the current Harmonized Tariff Schedule of the United States in the Uruguay Round Agreements Act of 1994.
The Uruguay Round tariff reductions and abolition of the quota system fell especially heavily on the U.S. textile industry. Our domestic industry has invested in equipment and worker training to respond to this competitive world market. Those investments were made with the understanding that there would be no further erosion of tariff protection at least until a new round of global trade talks are completed. It was with that understanding that much of the domestic textile industry acquiesced and did not vigorously oppose the Uruguay Round. This request, if granted, would violate the commitments our government made to maintain the Uruguay Round tariffs for our domestic manufacturers. Further, we understand that U.S. textile tariffs are "on the table" again in the Doha Round; it makes no sense to unilaterally give away a tariff now that we may use in the negations later in return for some concession from our trading partners.
The Board regulations acknowledge that any approval must be consistent with public policy. In this case the policy is the tariff schedule passed by Congress and signed into law by the President, which created the tariff inversion. Specifically, Board regulation at §400.27(a)(3) constrains the Board in the case where –
“The activity involves items subject to quantitative import controls or inverted tariffs, and the use of zone procedures would be the direct and sole cause of imports that, but for such procedures, would not likely otherwise have occurred, taking into account imports both as individual items and as components of imported products.”
The Application asserts that: "Relief from the tariff inversion will not be the sole cause of the increase of any imports. " I have no way to assess the veracity of that claim. However, I assert that the Board's own regulations support my argument that the Board ought to proceed cautiously when an inverted tariff is a major aspect of the justification for an Application.
Not merely the Board's regulation, but the Constitution and laws of the United States ought to guide the Board to proceed cautiously when granting tariff relief. Congress has the exclusive prerogative to set import duties (U.S. Constitution Article 1 Section 8) and has in limited ways, delegated that authority to the Executive. I do not question congressional delegation to the FTZ Board. Clearly, that is the intention of the FTZ Law. As early as 1890, Congress delegated tariff bargaining authority to the President and authorized him to suspend existing duty-free treatment on particular items by proclamation. The Supreme Court subsequently held that the authorizing statute, § 3 of the Tariff Act of 1890, 26 Stat. 612, did not unconstitutionally delegate either legislative or treaty-making authority to the President.
But Congress did not leave us without indication of how the limited delegation of tariff authority was to be used.
For example, the Trade Promotion Act delegates authority to the President to negotiate trade agreements, provides instructions for the goals in such negotiations, and requires the President to bring the signed agreement back to Congress for a vote. Congress, in other words, holds on to its power to set the tariff schedule. Granted a trade agreement is a much larger adjustment of the tariff schedule than is any single Board decision on an Application for tariff relief, but taken collectively, over time, Board decisions, if not taken with due deference to the congressionally-enacted tariff schedule (including tariff inversions) could radically alter the tariff schedule enacted by Congress.
In addition, the FTZ Law goes back to the 1930s, a time when Congress had few tools available to promote U.S. manufacturing in cases where a domestic producer claimed to be harmed by a tariff on foreign inputs. Filling the legislative calendar with debatable bills relating to tariff relief for individual persons would have been too cumbersome. The FTZ Law, wisely, delegated, in a limited way, that authority to the Board. Since the 1980s Congress has had a tool in place to do precisely that, the Miscellaneous Tariff Bill ("MTB"). The FTZ process and the MTB process are different and I don't mean to suggest that the Board is bound by the procedures for an MTB. However, in understanding how Congress intended the Board to use its delegated authority to suspend, effectively, a tariff, it is instructive to see standard of review that Congress uses to suspend a tariff via the MTB process. The MTB requires unanimous consent. Clearly, Congress believes that the bar for suspending a tariff should be very high.
(b) Past Board practice.
As will be shown later in these comments, there have been past cases where tariff inversion was asserted, and demonstrated, where the Board denied or restricted the request, further demonstrating that tariff inversion is not sufficient to compel a positive Board determination.
Coleman Assertion #2, The Three Threshold Test (pages 4 and 5)
Coleman cites the provision at 16 CFR 400.27(a) which states that –
"Board shall deny or restrict authority for proposed or ongoing activity if it determines that:
" (1) The activity is inconsistent with U.S. trade and tariff law, or policy which has been formally adopted by the Executive branch;
" (2) Board approval of the activity under review would seriously prejudice U.S. tariff and trade negotiations or other initiatives; or
" (3) The activity involves items subject to quantitative import controls or inverted tariffs, and the use of zone procedures would be the direct and sole cause of imports that, but for such procedures, would not likely otherwise have occurred, taking into account imports both as individual items and as components of imported products. "
(a) Policy.
Even if one accepts Coleman's argument that this request passes "The Three Threshold Test," all that has been established is that the Application need not necessarily be rejected. Passing the test at 15 CFR 400.27(a) does not compel the Board to approve the Application, nor, even, create an assumption of approval.
(b) Past Board practice.
As will be show later in these comments, there have been past cases where an Application passed the Three Threshold Test was denied or restricted by the Board.
Coleman Assertion #3, The Net Economic Benefit Test
(a) The potential harm were this request to be granted can best be addressed by domestic textile manufacturers. I understand they are represented on this panel.
(b) Past Board practice.
Unrestricted approval of this Application would be a substantial departure from past Board decisions and call into question the past judgment for the Board.
Since the year 2008 there have been several Applications and the Board determinations have been consistent.
There have been nine textile-related filings relating to production for subsequent release into the domestic U.S. market arising from a tariff inversion and to which the domestic U.S. textile industry objected, stating that they would be harmed because they made the product that would enter duty-free were the filings approved.
In two of the nine cases, Dockets 2010-28 and 2010-31, I cannot find a record of the Board's final determination, and assume that after so many years they are effectively denied.
For the remaining seven of the nine inverted tariff cases where the U.S. textile industry made the subject input, the Board denied the requests outright, or approved but with the restriction that privileged foreign status must be elected for goods for consumption in the U.S. market --
2011-48 Textile Athletic Tape
2012-54-B Carbon Fiber
2013-24-B Textile Fabric Adhesive Bandage Coating and Production
2013-25-B Rubber Coated Textile Fabric
2013-37-B Polypropylene Geotextiles
2013-58-B Polyacrylonitrile Fiber/Carbon Fiber Production
2013-25-B Rubber Coated Textile Fabric
As in the nine filings noted above, where the domestic U.S. textile was able and willing to supply the subject product, the Board denied the request for relief from the tariff inversion. As noted above, the domestic industry is able and willing to supply Coleman. Prior Board determinations drive to the conclusion that the Board ought to deny Coleman's Application.
I believe that the Board faithfully followed its regulations when it denied tariff inversion-related production authority filings in those cases where a domestic U.S. industry that was protected by the tariff in question. I also note that in ten other cases, where the domestic U.S. textile industry objected, but was unwilling or unable to supply the subject fabric, the Board gave approval for production in cases involving tariff inversion. Thus we see tariff inversion filings approved when the domestic industry could not supply the input and denied when, as in this case, the domestic industry can supply the input. Therefore consistency with prior Board actions indicates that the Board should deny Coleman's request.
Again, thank you for this opportunity to comment.
OTHER COMMENTS
By the March 11, 2016, deadline comments had been received from --
Supporting
Coleman (Mr. Dinsmore)
Coleman (Mr. Schmitt)
R R Donnelley
Outdoor Industry Association
Pregis
Sorini & Samet
Opposed
Agathon Associates
American Fiber Manufacturers Association
Duro (a company which formerly supported the application)
Highland Industries
Milliken and Company
National Council of Textile Organizations
United States Industrial Fabrics Institutes
Clients of Agathon Associates and subscribers to Agathon Associates' Trade Advisor Service can read all the comments plus background information lay out in easy to read format at http://www.agathonassociates.com/textile-pri/ftz/2015-53-B.htm. You will need to enter your username and password. If you do not know your username and password email David Trumbull at david@agathonassociates.com.
The information is also available free, but in a less organized format at http://ia.ita.doc.gov/ftzpage/.
