Textile Enforcement Bill Introduced to Fight Fraud

For years now, yarn and fabric mills have complained that free-trade agreements designed to bolster the U.S. textile industry have been undermined by foreign yarns posing as U.S.-made to gain duty-free access into the United States.

At the same time, industry leaders believe that many U.S. apparel importers have been undervaluing the clothing brought in from China to skirt higher duties, which creates unfair competition for U.S-made garments. The loss in tariff revenue is believed to be more than $1 billion.

To remedy this situation, nearly two dozen members of Congress on May 25 introduced a bill to beef up customs enforcement at the borders and bring more scrutiny to imported textiles.

The Textile Enforcement and Security Act of 2010, the first textile-specific customs enforcement legislation, was presented by Rep. Larry Kissell (D-N.C.) and had bipartisan support from several congressmen from Southern states, where the textile industry is strongest.

“This legislation will provide our U.S. customs with the necessary tools, resources and direction to effectively enforce our trade laws and help to bring a level playing field to U.S. workers,” said Bill Jasper, president of Greensboro, N.C.–based yarn producer Unifi Inc.

Customs fraud is nothing new, but textile leaders believe it is mushrooming. On May 20, Cass Johnson, president of the National Council of Textile Organizations, told the House Subcommittee on Trade that unscrupulous importers can cut 15 percent off the price of a garment by funneling illegal yarns into free-trade-agreement countries where all yarns are required to be from the region to earn duty-free status. Yarns from Asia do not qualify. “With textiles and apparel accounting for 46 percent of all customs revenue collected, nearly $12 billion a year, the stakes are enormous and the free-trade areas have become a magnet for fraudulent activity,” Johnson said.

“As a result, our members report seeing much more illegal activity than they did five or 10 years ago. There is a general feeling that fraudulent importers and producers have identified the loopholes in the system and how to utilize them for their benefit.”

Johnson noted that a 2008 report by the General Accounting Office, an investigative arm of the federal government, found that customs failed to collect $500 million in anti-dumping and countervailing duties. There have been recent reports, Johnson noted, of cases of extreme undervaluation of apparel and textiles coming from China. “We understand that there is a single case involving an importer of women’s apparel in New York where duty evasion could amount to $50 million or more.

“Reports of undervalued Chinese goods entering into the Port of Los Angeles through phony front companies that are paid pennies a garment have become all too routine,” Johnson said. “Add Chinese undervaluation to duty evasion in the CAFTA, NAFTA and Andean region and the loss to the U.S. Treasury is likely to be over $1 billion a year.”

Free-trade agreements—such as the North American Free Trade Agreement with Mexico and Canada and the Central American Free Trade Agreement with Guatemala, Nicaragua, Honduras, El Salvador, Costa Rica and the Dominican Republic—have become the U.S. textile industry’s main lifeblood. Almost everything the U.S. textile mills produce is sent to free-trade countries in the Western Hemisphere, all the way down to Peru and Colombia. Those yarns are spun into fiber, made into apparel and then sent back to the United States duty-free.

“This has helped build a large textile and apparel sector in the Western Hemisphere, which covers 10 countries, employs nearly 2 million workers and produced two-way trade in excess of $20 billion annually.” Johnson said.

The bill would allow the Department of Homeland Security to use fines and penalties to help pay for beefed-up customs investigations and training, place more textile and apparel import specialists at high-volume ports, establish electronic verification of textile and apparel imports, and put together a program to ensure that resident agents are held accountable for products imported under their name.

Industry leaders point out that textile and apparel import specialists working for customs are unevenly distributed at the country’s ports. Johnson noted that the Champlain, N.Y., port, which handles $501 million in textile and apparel preference claims, has 11 textile and apparel import specialists. But Miami and Fort Everglades, Fla., which handle $4 billion in textile and apparel preference claims, had only eight textile and apparel import specialists.

Furthermore, importers that do not reside in the United States and are outside the country’s legal authority have become a source of fraudulent activity and should be scrutinized. Non-residents are required to designate a resident agent in the state where the goods enter. However, the resident agent is not held accountable should the imports be undervalued or if the non-resident import can’t be found to collect duties or penalties. “It appears that fraudulent actors are increasingly aware of how to game the system,” Johnson said.