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WOODS CANADA LIMITED

Investigations


REPORT TO
MINISTER OF FINANCE
REQUEST FOR TARIFF RELIEF BY
WOODS CANADA LIMITED
REGARDING
CERTAIN PRINTED COTTON FABRICS
JUNE 8, 1995

TABLE OF CONTENTS


Request No: TR-94-004

Tribunal Members: Arthur B. Trudeau, Presiding Member
Charles A. Gracey, Member
Lyle M. Russell, Member


Research Director: Marcel J.W. Brazeau


Research Manager: André Renaud


Counsel for the Tribunal: John L. Syme


Registration and
Distribution Officer: Claudette Friesen

Address all communications to:

The Secretary
Canadian International Trade Tribunal
Standard Life Centre
333 Laurier Avenue West
15th Floor
Ottawa, Ontario
K1A 0G7

INTRODUCTION

On July 14, 1994, the Canadian International Trade Tribunal (the Tribunal) received terms of reference from the Minister of Finance (the Minister) pursuant to section 19 of the Canadian International Trade Tribunal Act. [1] The Minister directed the Tribunal to investigate requests from domestic producers for tariff relief on imported textile inputs for use in their manufacturing operations and to make recommendations in respect of those requests to the Minister.

Pursuant to the Minister’s reference, on January 4, 1995, the Tribunal received a request from Woods Canada Limited (Woods) of Toronto, Ontario, for the immediate and permanent removal of the customs duty on importations, from all countries, of 100% printed cotton fabric, of 40 x 42 construction/sq. in., yarn count of 21 x 10 and an approximate weight of 4.8 oz./sq. m (the subject fabric), for use as the inner lining in the production of sleeping bags.

On January 16, 1995, Woods further advised the Tribunal that the subject fabric is “100% cotton flannel.” It is used in the production of inner linings, which, in turn, are used in the production of sleeping bags with synthetic insulation. Woods alleged that the subject fabric is not available from Canadian production.

On February 8, 1995, the Tribunal, being satisfied that the request was properly documented, issued a notice of commencement of investigation, which was widely distributed and published in Part I of the February 18, 1995, edition of the Canada Gazette.

As part of the investigation, the Tribunal’s research staff sent questionnaires to potential producers of the subject fabric and of identical or substitutable fabrics. Questionnaires were also sent to known users of the subject fabric for use in the production of sleeping bags and to the only known importer of the subject fabric. A letter was sent to the Department of National Revenue (Revenue Canada) requesting information on the tariff classification of the subject fabric, and a sample was provided for laboratory analysis. Letters were also sent to a number of other government departments requesting information and advice.

A staff investigation report, summarizing the information received from these departments, from Woods and from other firms that responded to the questionnaires, was provided to the parties that had filed notices of appearance for this investigation. These parties are Woods and the Canadian Textiles Institute (CTI).

The CTI filed a submission with the Tribunal, to which Woods provided a response. A public hearing was not held for this investigation.

PRODUCT INFORMATION

Revenue Canada analyzed the subject fabric and confirmed that it is 100% printed cotton flannel fabric weighing 4.8 oz./sq. m. The fabric construction, however, is approximately 41 x 39/sq. in., with a yarn count of 25.7 x 8.9.

The subject fabric is classified for customs purposes under tariff item No. 5208.52.90 of Schedule I to the Customs Tariff. [2] It is dutiable at 16 percent ad valorem under the MFN tariff and the GPT; at 15.7 percent ad valorem under the BPT; at 5.2 percent ad valorem under the U.S. tariff; and at 14 percent ad valorem under the Mexico tariff.

The subject fabric has a flannel finish on one side. This finish is obtained by napping, i.e. by passing the fabric over rapidly revolving cylinders covered with fine wire brushes or wire card clothing, or set with teasels. The short and loose fibres (usually in the filling) are lifted to the surface by the teeth of the wire or teasels, forming the nap, which may be brushed or shorn even. Napped or flannel fabrics serve as excellent insulators because the nap creates numerous air cells or pockets.

Woods uses the subject fabric to produce inner linings which it incorporates with other components (i.e. outer shells, synthetic insulation and zippers) for use in the production of sleeping bags.

The subject fabric is cut and sewn to produce the inner lining. A similar procedure is repeated with other fabrics to produce the outer shell. The inner lining and outer shell are then sewn together on three sides to produce a sleeping bag case, on which the zipper is sewn. The case is then stuffed with insulation and, depending on the type of insulation, is quilted and sewn shut.

Similar and substitutable fabrics are also used in the production of inner linings. In addition, these fabrics are used for outer shells of other types of sleeping bags, as well as comforters, pillow ticking, products of the apparel industries (e.g. outer shell and/or inner shell for any category of garments, pyjamas, shirts, hospital garments, etc.), various accessories (e.g. bags), wrapping, packaging, etc. Such fabrics can also be used as an outer fabric in the production of furniture pads used by movers.

Total Canadian imports of the subject fabric are estimated for 1995 at about 3 million sq. m, for a total value for duty estimated at over 1 million dollars. In the past, these imports originated largely in Pakistan and, to a lesser extent, in the People’s Republic of China. It is anticipated that these imports will increase by 7 percent in volume and 19 percent in value in 1995.

The Canadian market for the subject fabric for use as inner lining in the production of sleeping bags in 1994 was the same as the market for imports, as Canadian producers did not sell the subject fabric to Canadian producers of sleeping bags for use as inner lining.

REPRESENTATIONS

In addition to Woods, the importer and four users of the subject fabric for use as inner lining in the production of sleeping bags support removal of the customs duty, as they do not consider that the subject fabric is available from Canadian production. As the inner linings of the four users may be 100% printed cotton flannel fabrics of slightly different construction, yarn count or weight, these users asked to benefit from the same tariff relief which Woods requested.

Woods’ request is for the immediate and permanent removal of the customs duty. Woods and other Canadian users of the subject fabric for use as inner lining in the production of sleeping bags estimate the duty savings at between $175,000 and $200,000 annually.

Woods is one of Canada’s major producers of sleeping bags using inner linings made from the subject fabric. It produced about 160,000 sleeping bags in 1994, of which those produced with inner linings made from the subject fabric amounted to 106,841 units, having a wholesale value of approximately 2.9 million dollars. For Woods, the tariff relief would allow it to cope with the continued price increases of cotton, a portion of which it has had to absorb, as it has had difficulty in passing on these increases to its wholesalers. It is also Woods’ belief that the tariff relief would put it in a better competitive position with offshore suppliers of sleeping bags in the low-to-medium price range of the market in which it is selling its products.

Canadian Recreation Products Inc. (CRP) of Montréal, Quebec, the other large domestic producer of sleeping bags, imports a similar fabric and stated that the tariff relief would enable it to face the intense competition from low-cost imports of sleeping bags from the People’s Republic of China. The CRP argued that the tariff relief requested would go a long way to help it compete with imported products and secure the employment of its 120 hourly production workers, as well as 16 staff positions in its organization.

As far as Woods is concerned, the subject fabric is the norm in the Canadian market for a particular type of sleeping bag aimed at a particular segment of the sleeping bag market. Canadian consumers expect and want the subject fabric as the inner lining of this type of sleeping bag. For the CRP, inner linings made from the subject fabric provide more warmth, have a soft feel and have found acceptance in the consumer market. Moreover, as these linings are composed of natural fibres, the CRP believes that they are more breathable, minimize fibre migration within the sleeping bag case and provide for superior printability.

Of the other three Canadian producers of sleeping bags, Western Fibres Limited (Western Fibres) of Vancouver, British Columbia, Unitex Quilting & Fibres Inc. of Saskatoon, Saskatchewan, and GIII Ltd. of Winnipeg, Manitoba, the largest, Western Fibres, stated that it has been in business for 41 years in Canada and that it has had a relationship with almost every weaving and knitting mill in the country. In its view, no one produces the subject fabric in Canada. Western Fibres pointed out that the specifications of the subject fabric can vary slightly, from time to time, depending “upon the availability of the foreign mill.”

Dominion Industrial Fabrics Company (DIFCO) of Montréal, Quebec, weaves cotton and polycotton greige fabrics at its production facility in Magog, Quebec, and dyes, prints and finishes the fabrics (i.e. plain finish, single napped, double napped and other special treatments if necessary) at its plant in Trois-Rivières, Quebec. It opposes the request claiming that these various fabrics are identical to or substitutable for the subject fabric and are suitable for use as sleeping bag linings. Analysis done by Revenue Canada on the three samples submitted by DIFCO revealed that they were dyed fabrics with characteristics similar to those of the subject fabric. However, if they were to be imported, Revenue Canada advised that they would be classified under tariff item No. 5208.32.90 as dyed fabrics, and not as printed fabrics of tariff item No. 5208.52.90 under which the subject fabric is classified. DIFCO also submitted a sample of a printed polycotton fabric. Consoltex Inc. (Consoltex) and Rayonese Textile Inc. (Rayonese), both of Montréal, Quebec, also produce polycotton fabrics, and Consoltex produces nylon fabrics, which they both consider to be substitutable for the subject fabric. As such, they also oppose the request for tariff relief.

DIFCO did not provide evidence of sales to producers of sleeping bags. It argued that a lining fabric represents only a small portion of the overall cost of a sleeping bag, with many other factors (sleeping bag construction, type of fill, etc.) being more likely to affect the ultimate selling price. On the other hand, both Consoltex and Rayonese have sold their fabrics to Canadian producers of sleeping bags. In fact, five years ago, Consoltex specifically developed a lining fabric made of 100% nylon (Nylon Lining 72”), with a width of 72 in., specifically for use as the inner lining in the production of sleeping bags. Consoltex also questioned the relative importance of the tariff relief to the unit selling price of a sleeping bag and argued that giving any advantage to an imported fabric could only put downward pressure on the price of identical or substitutable domestic fabrics.

The Department of Foreign Affairs and International Trade informed the Tribunal of the current quota restraints on finished cotton fabrics. In addition, it advised that ex-quota entry on textile inputs will be considered where recommendation has been made by the Tribunal to remove the customs duty on the basis of non-availability.

Revenue Canada has indicated that there would be no additional costs, over and above those already incurred by it, to administer the tariff relief should it be granted.

The CTI represents Canadian manufacturers of textiles. In a preliminary submission, it opposed the request on the basis that identical or substitutable fabrics are produced in Canada and that duty-free entry of imported fabrics would be damaging to domestic sales, production, employment and investment. Subsequently, following receipt of the staff investigation report, the CTI expanded on the reasons for its opposition to the request by pointing out that domestic fabrics are available for the specified end use at a price both above and below the price of imported fabrics. It noted that world cotton price increases create opportunities for substitutable domestic fabrics. The CTI added that there is ample evidence of fabric substitutability in the market for use as inner lining in the production of sleeping bags. According to the CTI, the absence of domestic sales of the subject fabric to any domestic producer of sleeping bags for the requested end use should not justify the permanent removal of the customs duty. Such a rationale might provide users of domestic fabrics with an economic incentive to switch to imports. Moreover, any purchase of domestic fabrics would be seen by users as an impediment to the removal of the customs duty. The CTI also observed that the tariff relief would not represent a significant factor for the users, as it would represent something in the order of $0.60 per sleeping bag, which is far too small a factor to remedy any real sleeping bag input problem. The CTI made a number of other observations concerning general tariff policy and the textile tariff relief program, including one on the fact that permanent tariff relief will continue to distort competition once cotton prices come down.

Woods responded to the staff investigation report and the CTI?92's submission by advising the Tribunal that, in order to stay in business, a company must give its customers what they want. Woods’ customers stipulate cotton flannel in the sleeping bags. Woods concluded by stating that it had tried many times to market sleeping bags with a nylon lining and, each time, had found poor acceptance in the Canadian market.

ANALYSIS

The primary direct benefits of granting the tariff relief, based on the historical level of imports of the subject fabric and the projections provided by Woods and the four Canadian users of the subject fabric or of identical or substitutable fabrics, would amount to between $175,000 and $200,000 per annum, if the subject fabric were dutiable under the BPT and assuming no further import volume or price changes.

Sleeping bags are offered for sale in the Canadian market with inner linings made from different fabrics, for example, the subject fabric, plain cotton (i.e. not napped or brushed), polycotton blends, nylon and knitted fabrics of wool and nylon acetate.

Woods and the CRP, the two major users in Canada of the subject fabric used as inner linings, indicated that sleeping bags with such inner linings occupy a particular segment of the market, i.e. the low-to-medium price range in which sleeping bags with both the subject fabric and substitutable fabrics used as inner linings are found. Woods and the CRP also stated that sleeping bags with inner linings made from the subject fabric have found consumer acceptance. They also emphasized the need to remain competitive with their products in the face of import competition from finished sleeping bags.

DIFCO indicated that it is a Canadian producer of cotton fabrics that are identical to the subject fabric. Nevertheless, it did not produce evidence of sales nor attempts of sales of an identical fabric to Canadian sleeping bag producers for use as inner linings. While it indicated sales of similar cotton fabrics for other uses, it declined to provide prices at which they were sold in Canada. Moreover, the sample cotton fabrics that it submitted would not fall within the ambit of the tariff item for which tariff relief has been requested.

Consoltex and Rayonese produce fabrics which are substitutable for the subject fabric, namely, polycotton and nylon fabrics, which are also used to produce inner linings for sleeping bags. Indeed, Canadian producers of sleeping bags purchased such fabrics in 1994. Consoltex also claimed that some of its substitutable fabrics were priced lower than the subject fabric for which tariff relief has been requested.

Finally, the CTI referred to the reason stated for the request, namely, the rising prices of cotton. It pointed out that, although cotton prices go up periodically, they inevitably come down. In its view, despite the prices coming down, the tariff removal would be permanent.

In sum, for the Tribunal, it is clear that Canadian producers of textile fabrics do not sell the subject fabric to Canadian producers of sleeping bags for use as inner linings nor do they appear to be actively soliciting such business. Consoltex does sell substitutable fabrics for use as inner linings, even at prices that are lower than those of the subject fabric, but these are not used by Woods and some of its domestic competitors to produce sleeping bags in Canada for the particular market segment which they have traditionally supplied. There is a wide array of sleeping bags offered for sale in the Canadian market, and each sleeping bag manufacturer is producing its own product to carve its own market niche.

The absence of evidence of sales of the subject fabric by domestic producers suggests that, notwithstanding the domestic producers’ claims that they produce substitutable fabrics, those fabrics have failed to gain market acceptance in the segment of the sleeping bag market at issue in this case. In the absence of any such sales, it is difficult to consider that tariff removal would impart a cost to domestic producers that claim to be producing directly competing products having market acceptance. The Tribunal agrees with the CTI that the recent sharp increase in the world prices of cotton should not constitute a reason for tariff removal, as such price movements apply to all users. This factor was not a consideration in the Tribunal’s decision. The subject fabric is physically different from substitutable fabrics (i.e. it provides more warmth, has a soft feel, is more breathable and provides for superior printability). The subject fabric is used by Woods to produce sleeping bags in the low-to-medium price range of the market where it is encountering some price pressure from offshore competition. Granting the tariff relief would allow Woods and other Canadian sleeping bag producers to be more competitive with their products by paying less duty for the subject fabric for which there is no recent history of sales by domestic producers or sourcing by domestic users.

RECOMMENDATION

In view of the above information and evidence submitted, the Tribunal hereby recommends to the Minister that the customs duty on importations, from all countries, of 100% printed cotton flannel fabric for use as inner lining in the production of sleeping bags be permanently removed.

Arthur B. Trudeau
_________________________
Arthur B. Trudeau
Presiding Member


Charles A. Gracey
_________________________
Charles A. Gracey
Member


Lyle M. Russell
_________________________
Lyle M. Russell
Member


1. R.S.C. 1985, c. 47 (4th Supp.).

2. R.S.C. 1985, c. 41 (3rd Supp.).


[Table of Contents]

Initial publication: August 28, 1996

Case Number(s)

TR-94-004

Attachment(s)

Status

Publication Date

Wednesday, August 28, 1996

Modification Date

Tuesday, January 20, 2004