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LOUBEN SPORTSWEAR INC.

Investigations


REPORT TO
THE MINISTER OF FINANCE
REQUEST FOR TARIFF RELIEF BY
LOUBEN SPORTSWEAR INC.
REGARDING
DYED WOVEN FABRICS
MARCH 21, 1996

TABLE OF CONTENTS


Request No.: TR-95-011

Tribunal Members: Arthur B. Trudeau, Presiding Member
Robert C. Coates, Q.C., Member
Desmond Hallissey, Member


Research Director: Marcel J.W. Brazeau


Research Manager: Rose Ritcey


Counsel for the Tribunal: Gerry Stobo


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 June 2, 1995, the Tribunal received a request from Louben Sportswear Inc. (Louben), of Montréal, Quebec, for the permanent removal of the customs duty on importations of certain dyed, woven triacetate/polyester fabrics for use in the production of ladies’ coordinated sportswear (the subject fabrics). Louben requested that tariff relief be granted retroactively to September 30, 1994.

On September 20, 1995, the Tribunal, being satisfied that the request was properly documented, issued a notice of commencement of investigation, which was distributed and published in the September 30, 1995, edition of the Canada Gazette, Part I. [2] On October 20, 1995, the Tribunal issued and distributed to interested parties a notice of amendment to the notice of commencement of investigation to reflect the fact that the descriptions of the subject fabrics had been modified.

As part of the investigation, the Tribunal’s research staff sent questionnaires to 10 potential producers of fabrics identical to or substitutable for the subject fabrics. Questionnaires were also sent to 16 potential users of the subject fabrics in the manufacture of ladies’ coordinated sportswear. A letter was sent to the Department of National Revenue (Revenue Canada) requesting information on the tariff classification of the subject fabrics, and samples of the subject fabrics were provided for laboratory analysis. Letters were also sent to a number of other government departments requesting information and advice.

On November 23, 1995, a staff investigation report, summarizing the information received from these departments, Louben and other firms that responded to the questionnaires, was provided to parties that had filed notices of appearance for this investigation. These parties are Louben and the Canadian Textiles Institute (CTI).

Following distribution of the staff investigation report, the CTI filed a submission with the Tribunal, to which Louben responded.

A public hearing was not held for this investigation.

PRODUCT INFORMATION

Louben describes the subject fabrics as consisting of three qualities of woven, dyed triacetate/polyester fabrics:

(1) quality No. S-80620, which contains 70 percent by weight of triacetate filaments and 30 percent by weight of polyester filaments;

(2) quality No. S-81490, which contains 75 percent by weight of triacetate filaments and 25 percent by weight, of polyester filaments; and

(3) quality No. S-83680, which contains 81 percent by weight of triacetate filaments and 19 percent by weight of polyester filaments.

According to Louben, quality No. S-80620 is the predominant quality of the subject fabrics which it imports.

Revenue Canada analyzed samples of the three qualities of the subject fabrics and concluded that quality No. S-83680 contains 80 percent by weight of triacetate filaments and 20 percent by weight of viscose rayon filaments. Its analysis confirmed the triacetate/polyester blends for quality Nos. S-80620 and S-81490 as submitted by Louben. The analysis by Revenue Canada also provided the following technical information about the three samples.

Quality No. S-80620

Quality No. S-81490

Quality No. S-83680

Weight

220 g/m2

213 g/m2

168 g/m2

Yarn Size

Warp

Weft

211 decitex

211 decitex

84 decitex

331 decitex

84 decitex

213 decitex

Number of Yarns

Warp

Weft

2

2

1

2

1

2

Twist Factor

1,120 turns/m

results not provided

results not provided

In response to the Tribunal’s questionnaire, Nygård International Ltd., another Canadian manufacturer of ladies’ coordinated sportswear, indicated that it imports two qualities of triacetate/polyester fabrics: the first consisting of 71 percent by weight of triacetate filaments and 29 percent by weight of polyester filaments, with a fabric weight of 246 g/m2; and the second consisting of 70 percent by weight of triacetate filaments and 30 percent by weight of polyester filaments, with a fabric weight of 305 g/m2. Jones Apparel Group Canada Inc. (Jones) and Michael Kan Enterprises Inc. (Michael Kan) also manufacture ladies’ coordinated sportswear in Canada and reported imports of various blends of triacetate/polyester fabrics in response to the Tribunal’s questionnaire.

According to Revenue Canada, in 1996, quality Nos. S-80620 and S-81490 are classified for customs purposes under classification No. 5408.32.00.22 of Schedule I to the Customs Tariff [3] and are dutiable at 19.0 percent ad valorem under the MFN tariff and the GPT; at 20.2 percent ad valorem under the BPT; at 5.0 percent ad valorem under the U.S. tariff; and at 17.5 percent ad valorem under the Mexico tariff. [4] Similarly, according to Revenue Canada, in 1996, quality No. S-83680 is classified under classification No. 5408.22.90.81, with the rates of duty being the same as for classification No. 5408.32.00.22. [5]

Louben cuts and sews the subject fabrics into ladies’ pants, skirts, blouses, vests and dresses at its plant in Montréal and sells the finished garments in both Canada and the United States.

In 1995, total imports of the subject fabrics by Louben and of other blends of triacetate/polyester fabrics by respondents to the Tribunal’s questionnaires were approximately 329,000 linear metres, with a value for duty of $4.7 million.

REPRESENTATIONS

In its request for tariff relief, Louben submitted that removal of the customs duty on imports of the subject fabrics would enable it to reduce its manufacturing costs, which, in turn, would make its products more attractive to both Canadian and export customers. Additional sales would enable the company to expand its operations and increase employment. Further, as a result of the elimination of the Duty Drawback Program on January 1, 1996, [6] Louben was concerned that its U.S. customers would not accept an increase in price.

The CTI, on behalf of its members, opposes the request because there is no possibility that the tariff relief can be granted without causing price injury to the current and future domestic production of competing fabrics.

The CTI submits that Cleyn & Tinker Inc. (Cleyn & Tinker) manufactures a substantial range of worsted crepe fabrics of wool and polyester/wool which compete with the subject fabrics in the manufacture of ladies’ coordinated sportswear. In addition, the CTI submits that Consoltex Inc. (Consoltex) produces crepe and “crepe-effect” fabrics of various man-made blends which, albeit selling at lower prices than the subject fabrics, also compete with them in the manufacture of ladies’ coordinated sportswear. Further, Consoltex has made significant investments in developing fabrics using high-twist yarns that, in the future, will enable the company to sell crepe fabrics of man-made fibre blends at higher price points.

In light of the results of the analysis by Revenue Canada, which is at odds with the fabric descriptions provided by Louben, the CTI questions how Louben can claim that the market will not accept any substitutes for triacetate/polyester fabrics. Similarly, the CTI notes that, in its response to the Tribunal’s questionnaire, Lana Lee Fashions Inc. (Lana Lee), a competing manufacturer of ladies’ coordinated sportswear, claims a polyester/acetate blend is substitutable for the subject fabrics.

Referring to the statement by Louben that the subject fabrics are only available from one Japanese mill, the CTI submits that to grant tariff relief in this case would provide Louben with an unfair commercial advantage. Further, the CTI contends that it is by no means clear whether the subject fabrics will continue to be competitive in Canada if their price increases. Therefore, to grant tariff relief would only artificially prolong the commercial life of the subject fabrics in Canada.

Finally, the CTI submits that it is “unrealistic and misleading” for Tribunal staff to estimate a market for the subject fabrics in Canada because no such market exists in the minds of Canadian consumers, retail buyers or manufacturers of ladies’ coordinated sportswear. Further, the CTI views as “reprehensible” the assumption in the economics section of the staff investigation report that any price injury to domestic producers is exactly offset by the benefits of lower prices to users. According to the CTI, it makes no sense for Canada to sacrifice normal tariff revenue if the benefits accrue to foreign textile producers or domestic retailers.

In its response to the CTI, Louben submits that the domestic textile industry has been unable to show any evidence that the subject fabrics are, or will be in the foreseeable future, manufactured in Canada. Further, the various domestic fabrics that, according to the CTI, compete with the subject fabrics are much less expensive than the subject fabrics, which indicates that they are targeted at different market segments.

Louben rejects the claim by Lana Lee that a blend of polyester/acetate is substitutable for the subject fabrics, referring to the higher heat resistance and improved ease of care characteristics of triacetate fabrics compared to acetate fabrics. Further, Louben notes that there is a substantial difference in price between the two fabrics and that Lana Lee targets the “missy” and “contempra” segments of the women’s apparel market rather than the high-end segment.

Finally, Louben submits that the Japanese manufacturer from which it purchases the subject fabrics maintains that, despite the results of Revenue Canada’s analysis, quality No. S-83680 is composed of triacetate and polyester. In this regard, Louben points to the statement by Consoltex in its response to the Tribunal’s questionnaire that it had analyzed the three samples of the subject fabrics and found that they were “blended with triacetate and polyester high twist yarns.”

The Department of Foreign Affairs and International Trade informed the Tribunal that Canada currently maintains quota restraints on polyester filament fabric, including any fabric mixed mainly or solely with polyester filaments imported from Poland, the Republic of Korea and Taiwan.

The bilateral agreement which provides for these restrictions between the governments of Canada and Poland has been in place since 1979. The 1994 original restraint level for polyester filament fabric of item 35 of the Canada/Poland agreement was set at 114,142 kg, with an annual growth rate of 6 percent. Imports from Poland were nil in 1994.

With respect to the Republic of Korea and Taiwan, bilateral agreements have been in place since 1978. The 1994 original restraint level for polyester filament fabric of item 30d of the Canada/Republic of Korea agreement was set at 1,154,367 kg, with an annual growth rate of 7 percent. The annual utilization of the adjusted 1994 subrestraint level for item 30d, set at 1,269,804 kg, was 1,201,468 kg, or 95 percent. The 1994 original subrestraint level for polyester filament fabric of item 30d of the Canada/Taiwan Textile Federation agreement was set at 466,077 kg, with an annual growth rate of 3 percent. The annual utilization of the adjusted 1994 subrestraint level for item 30d, set at 514,271 kg, was 527,435 kg, or 103 percent.

A recommendation to grant tariff relief would allow interested parties to apply to the Minister for International Trade for ex-quota treatment.

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.

ANALYSIS

The laboratory analysis undertaken by Revenue Canada concluded that one of the three samples of the subject fabrics submitted by Louben, namely, quality No. S-83680, consists of a blend of triacetate and viscose rayon, rather than a blend of triacetate and polyester, as claimed by the Japanese supplier. In the opinion of the Tribunal, this anomaly does not prevent it from analyzing the merits of the request for tariff relief as submitted by Louben, which was for the removal of the customs duty on imports of triacetate/polyester fabrics. In other words, the Tribunal does not intend to address the question of whether tariff relief should be granted on imports of triacetate/rayon fabrics since these fabrics did not form part of Louben’s request.

In making its recommendation to the Minister on the appropriateness of reducing or removing the customs duty, the Tribunal must consider, first, whether identical or substitutable fabrics are produced in Canada and, second, whether granting tariff relief will maximize net economic gains for Canada. In many previous investigations of requests for tariff relief, there was not an identical fabric manufactured in Canada and, accordingly, the issue of product substitutability became central to the Tribunal’s analysis. The terms of reference from the Minister provide broad guidance in resolving the issue of substitutability. In addition, based on its experience in a number of recent cases, the Tribunal has developed a set of more specific factors which has proven useful in analyzing the issue of substitutability.

One of the first factors to which the Tribunal generally looks when assessing the substitutability of domestic and imported fabrics is the technical description of the fabrics. All other things being equal, the Tribunal finds it difficult to accept claims of substitutability when the technical descriptions of domestic and imported fabrics are significantly different, especially with respect to those characteristics that define the essential nature of the fabric under consideration. In the current case, none of the fabrics alleged as substitutable by Consoltex and Cleyn & Tinker consist of a blend of triacetate and polyester or, in fact, even contain triacetate. The evidence shows that triacetate imparts certain desirable characteristics to fabrics, including excellent drapeability and ease of care. Accordingly, the Tribunal views the absence of any domestic fabrics containing triacetate as being indicative, although not determinative, of a lack of substitutability.

Another factor that the Tribunal considers when assessing the substitutability of domestic and imported fabrics is market acceptance, or the extent to which consumers perceive the fabrics to be substitutable. In other words, although the technical descriptions of two fabrics may be different, if consumers perceive that the fabrics provide the same set of benefits, then the Tribunal is more likely to consider the fabrics as being substitutable, notwithstanding any differences in their construction. The Tribunal has found that the ability of allegedly substitutable fabrics to meet the same objective performance standards is particularly important in assessing the substitutability of fabrics used in industrial applications. [7]

One indicator of a favourable market acceptance of the subject fabrics is ongoing demand for garments manufactured from both the subject fabrics and the allegedly substitutable domestic fabrics, even though the subject fabrics are higher priced. The evidence in this case shows that garments manufactured from triacetate/polyester fabrics have been widely sold for several years in the ladies’ coordinated sportswear market, alongside garments manufactured from the allegedly substitutable domestic fabrics. Therefore, it appears that consumers perceive meaningful differences between garments manufactured from triacetate/polyester fabrics and those manufactured from other fabrics, including the various fabrics produced by Consoltex and Cleyn & Tinker.

The Tribunal views price as an essential factor when assessing substitutability and one that is closely related to market acceptance, that is, “[c]onsumers of certain fabrics are willing to pay more for characteristics that they feel are available in one fabric but not in another. Therefore, evidence which shows that one fabric commands a different price from another would tend to indicate to the Tribunal that the two fabrics are not direct substitutes, even though, functionally, the fabrics are used in the same end product, i.e. skirts or pants. [8] ” In the current case, the average landed costs of triacetate/polyester fabrics imported by Louben and other Canadian apparel manufacturers is significantly higher than the average selling prices of the allegedly substitutable fabrics manufactured by Consoltex and Cleyn & Tinker. Accordingly, even with the removal of customs duty, the landed costs of triacetate/polyester fabrics will remain, in most instances, significantly higher than the selling prices of the allegedly domestic substitutes.

Finally, the ability of the domestic textile industry to supply an identical or substitutable fabric is a factor that the Tribunal usually considers in its assessment of requests for tariff relief. In the current case, with respect to whether the domestic textile industry has the ability to supply an identical fabric, the Tribunal notes that neither Consoltex nor Cleyn & Tinker made submissions that they currently manufacture triacetate/polyester fabrics or that they have plans to do so in the future. With respect to whether the industry has the capacity to supply substitutable fabrics, the Tribunal does not dispute that Consoltex and Cleyn & Tinker currently manufacture commercial volumes of the allegedly substitutable fabrics. However, this fact in and of itself does not resolve the issue of whether these fabrics can be considered substitutable for imported triacetate/polyester fabrics.

On the basis of the foregoing, the Tribunal concludes that the allegedly substitutable fabrics manufactured by Consoltex and Cleyn & Tinker are, in large measure, not substitutable for triacetate/polyester fabrics imported by Louben and other apparel manufacturers for use in the production of ladies’ coordinated sportswear.

In reaching this conclusion, the Tribunal recognizes that the allegedly substitutable fabrics manufactured by Consoltex and Cleyn & Tinker are currently sold to Canadian ladies’ apparel manufacturers and that, as a result, garments manufactured from these fabrics may be present in the marketplace at the same time as garments manufactured from triacetate/polyester fabrics. However, in cases where there is no domestic production of an identical fabric, the Tribunal is of the view that claims of substitutability by domestic textile producers require more than just a simultaneous market presence. Simultaneous market presence, even in the same stores, does not necessarily mean competition. Rather, in these instances, the Tribunal looks for evidence that both consumers of the end products and manufacturers of those end products perceive the domestic fabrics as direct and effective substitutes for the imported fabric(s) for which tariff relief is being sought. The Tribunal does not accept that Canadian users of imported textile products should be prevented from obtaining products that are available in global markets at competitive prices, if there are no widely accepted alternatives currently manufactured by domestic textile producers.

Further, with respect to the issue of substitutability, the Tribunal finds no evidence to support the claim by Lana Lee that a fabric consisting of 52 percent polyester and 48 percent acetate is substitutable for the subject fabrics and notes, among other differences, the significantly lower landed cost of the former.

Having concluded that domestic fabrics are not substitutable for imported triacetate/polyester fabrics, the Tribunal must assess whether granting tariff relief on imports of triacetate/polyester fabrics will maximize net economic gains for Canada.

According to the analysis presented in the staff investigation report, the primary direct benefits of granting tariff relief would be approximately $970,000 in savings on customs duties by current importers of the subject fabrics. In addition, the removal of the customs duty would enable Louben and other domestic apparel manufacturers to be more competitive in the Canadian market against imports of garments manufactured from triacetate/polyester fabrics. Similarly, since Louben and other domestic apparel manufacturers export garments manufactured from triacetate/polyester fabrics to the United States, tariff relief would enhance their competitiveness in that market.

The Tribunal recognizes that, to any extent that domestic fabrics may be substitutable for triacetate/polyester fabrics, tariff relief could impose some costs on domestic textile producers, including, theoretically, lower prices or loss of sales. However, the Tribunal is of the view that, on balance, removal of the custom duty in this case will result in maximum net economic gains for Canada.

In the view of the Tribunal, the evidence does not indicate that Louben will obtain an unfair commercial advantage if tariff relief is granted, in that there is no reason to conclude that other domestic apparel manufacturers will be unable to import triacetate/polyester fabrics if they so choose.

As a final point, the Tribunal finds no exceptional circumstances in the current case that would warrant granting retroactive tariff relief.

RECOMMENDATIONS

In light of the foregoing, the Tribunal hereby recommends to the Minister that the customs duty on importations of

woven, dyed fabrics containing 70 percent or more but not exceeding 84 percent by weight of cellulose triacetate filaments and between 16 percent or more but not exceeding 30 percent by weight of polyester filaments, of classification No. 5408.32.00.22, for use in the manufacture of ladies’ jackets, skirts, pants, vests and dresses

be removed for an indeterminate period of time.

Should the Minister grant tariff relief pursuant to the Tribunal’s recommendation and a Canadian producer commence production of triacetate/polyester fabrics, that producer may request the commencement of an investigation for the purpose of recommending the amendment of an order.

In the meantime, the Tribunal considers it important that tariff relief be granted to allow Canadian apparel exporters to maintain the same level of benefits as were previously available to them under the Duty Drawback Program so as to avoid additional input costs related to textile fabrics not available in Canada.

Arthur B. Trudeau
_________________________
Arthur B. Trudeau
Presiding Member


Robert C. Coates, Q.C.
_________________________
Robert C. Coates, Q.C.
Member


Desmond Hallissey
_________________________
Desmond Hallissey
Member


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

2. Vol. 129, No. 39 at 3432.

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

4. In 1995, quality Nos. S-80620 and S-81490 were classified under classification No. 5408.32.00.90 and were dutiable at 20.5 percent ad valorem under the MFN tariff and the GPT; at 20.2 percent ad valorem under the BPT; at 7.5 percent ad valorem under the U.S. tariff; and at 20.0 percent ad valorem under the Mexico tariff.

5. In 1995, quality No. S-83680 was classified under classification No. 5408.22.90.90 and was dutiable at the same rates as classification No. 5408.32.00.90.

6. For Canadian-U.S. trade, a “duty refund system” will replace the Duty Drawback Program on January 1, 1996. For fabrics used in apparel, the refund will be equivalent to the lesser of: (a) the duty paid on a fabric imported to make garments; or (b) the duty paid on the finished garments when exported to the United States. The duty refund system will be phased out at the same pace as the NAFTA tariff-free access is phased in. Full duty drawbacks will continue to apply indefinitely to Canadian apparel exports to the United States which are traded at full MFN rates, after tariff preference levels have been fully utilized. For apparel exports to non-NAFTA countries, duty drawbacks will continue to apply indefinitely.

7. See Report to the Minister of Finance: Request for Tariff Relief by Healtex Manufacturing Inc. Regarding Mertex Plus Fabric , Canadian International Trade Tribunal, Request No. TR-94-015, October 2, 1995; and Report to Minister of Finance: Request for Tariff Relief by Équipement Saguenay (1982) Ltée Regarding Vinex FR-9B Fabric , Canadian International Trade Tribunal, Request No. TR - 94 - 009, June 5, 1995.

8. See Report to the Minister of Finance: Requests for Tariff Relief by Château Stores of Canada Ltd. and Hemisphere Productions Inc. Regarding Armani Gabardine , Canadian International Trade Tribunal, Request Nos. TR-94-011 and TR-94-019, September 19, 1995, at 6.


[Table of Contents]

Initial publication: August 28, 1996

Case Number(s)

TR-95-011

Attachment(s)

Status

Publication Date

Wednesday, August 28, 1996

Modification Date

Tuesday, January 20, 2004