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PERFECT DYEING CANADA INC.

Investigations


REPORT TO
THE MINISTER OF FINANCE
REQUEST FOR TARIFF RELIEF BY
PERFECT DYEING CANADA INC.
REGARDING
RAW WHITE ACRYLIC YARN IN HANK FORM
FEBRUARY 26, 1996

TABLE OF CONTENTS


Request No.: TR-95-012

Tribunal Members: Anthony T. Eyton, Presiding Member
Lise Bergeron, Member
Lyle M. Russell, Member
Research Director: Marcel J.W. Brazeau


Research Manager: Richard Cossette


Counsel for the Tribunal: Hugh J. Cheetham


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 9, 1995, the Tribunal received a request from Perfect Dyeing Canada Inc. (Perfect Dyeing) of Montréal, Quebec, for the permanent removal of the customs duty on importations of high-bulk, raw white (undyed) yarn of 100 percent acrylic in hank form for use in the production of high-bulk, dyed acrylic yarn (the subject yarn).

On September 29, 1995, the Tribunal, being satisfied that the request was properly documented, issued a notice of commencement of investigation into the appropriateness of reducing or removing the tariff on the subject yarn. The notice was distributed and published in the October 7, 1995, edition of the Canada Gazette, Part I. [2]

As part of the investigation, the Tribunal’s research staff sent questionnaires to potential producers of identical or substitutable yarns. Questionnaires were also sent to known users of the subject yarn for use in the production of high-bulk, dyed acrylic yarn. A letter was sent to the Department of National Revenue (Revenue Canada) requesting information on the tariff classification of the subject yarn, 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, Perfect Dyeing and other interested parties was provided to those that had filed notices of appearance for this investigation. These parties included Perfect Dyeing, Tex-Dye Industries (1980) Inc. (Tex-Dye), the Canadian Textiles Institute (CTI) and Dawtex Industries, a Division of Pickering Distributors Inc. (Dawtex).

A public hearing was not held for this investigation.

PRODUCT INFORMATION

Perfect Dyeing described the subject yarn as high-bulk, raw white (undyed) yarn of 100 percent acrylic in hank form for use in the production of high-bulk, dyed acrylic yarn.

Perfect Dyeing indicated in its request that the subject yarn was classified for customs purposes under tariff item No. 5509.32.00 of Schedule I of the Customs Tariff. [3]

Revenue Canada analyzed the sample submitted by Perfect Dyeing and determined that it is an unbleached, multiple (2-ply) yarn, of acrylic staple fibres, in hank form. Revenue Canada confirmed that, for customs purposes, the subject yarn is classified under classification No. 5509.32.00.00.

The Revenue Canada laboratory found that the subject yarn had not yet been bulked. However, when it was submitted to wet processing (e.g. boiling water), the subject yarn shrank by more than 15 percent, thus increasing the bulkiness of the subject yarn. The hank was found to weigh 448 g. The laboratory also found that the subject yarn measured 577 decitex, or 288 decitex per single yarn (per ply), that the metric count of the subject yarn was 17, or 35 per single yarn, and that the subject yarn had approximately 240 turns per metre in the ply.

Revenue Canada added that, for classification purposes, it is unable to distinguish whether or not a yarn is “high-bulk” versus “bulk” or whether or not the yarn has the potential of being “high bulked.” Revenue Canada further advised the Tribunal that, because there is no clear definition of the term “high-bulk,” it would be preferable to use the term “bulk,” rather than “high-bulk,” in any proposed recommendation for tariff relief. Regarding end use, Revenue Canada does not see merit in the wording “for use in the production of high-bulk, dyed acrylic yarn,” as it is understood that the subject yarn would require dyeing before its ultimate use. Revenue Canada would have difficulty administering a tariff code which referred to the manufacture of “low cost, mass market [4] ” goods and suggests the following terms, should an end-use condition be required: “for use in Canadian manufactures.”

Revenue Canada advises that the subject yarn is dutiable at 10 percent ad valorem under the MFN tariff; at 3 percent ad valorem and 3.3¢/kg under the U.S. tariff; and at 8 percent ad valorem and 8.8¢/kg under the Mexico tariff.

Total imports of the subject yarn for use in the production of high-bulk, dyed acrylic yarn for the 12-month period ending July 31, 1995, are estimated to have amounted to more than 1 million kg, having a total value of roughly $5 million. [5] The imports originated in the Republic of Korea, the People’s Republic of China, Indonesia and Malaysia. The estimated market for the subject yarn consisted only of sales from these imports in the referenced period. Imports by Perfect Dyeing held an important share of the market during this period.

Perfect Dyeing notes that the key physical characteristics on which the request is based are the fibre and form of the acrylic yarn required, i.e. raw white and in hank form. “Raw white” refers to the fibre in its natural, undyed state. In its raw white state, the yarn cannot be used by a manufacturer of hats or accessories, as it is not ready for knitting, and has not been “bulked” by the process of dyeing. In the terminology of the industry, the yarn is “not relaxed,” meaning that it will shrink to size when exposed to relatively low water temperatures.

The subject yarn is dyed by Perfect Dyeing in hank form to allow it to “bulk up” freely and “shrink” its full potential during the dyeing process. The subject yarn will shrink anywhere from 22 to 28 percent during dyeing. Perfect Dyeing stresses that the subject yarn can only be used in hank form, i.e. all its production machinery is designed exclusively for dyeing yarns on hanks. The subject yarn is used to produce high-bulk, dyed acrylic yarn, which is sold to knitters that produce a broad variety of high-volume, low-cost apparel and accessories, such as hats and sweaters.

REPRESENTATIONS

Perfect Dyeing alleges that there is no current Canadian production of the subject yarn. High-bulk, dyed acrylic yarn is said to be a very price-sensitive commodity, whose end products compete aggressively against imports on the exclusive basis of price.

The reason for the request is to enable the domestic industry, i.e. dyers and knitters, to increase its competitiveness by the value of the duty, thereby increasing volume. Perfect Dyeing stressed that this increase in volume is targeted at the expense of imports of finished products and not of other domestic yarns. According to Perfect Dyeing, since there is no longer any domestic supply of the subject yarn, the duty is hindering the larger marketplace from being competitive.

In response to arguments raised that hank dyeing is antiquated and not cost-efficient, Perfect Dyeing argues that hank dyeing is widely acknowledged as the best process to produce the highest bulk and the best loft and hand in a high-bulk acrylic yarn. There is an abundant supply of high-bulk acrylic yarn on hanks available from mills throughout the world, and not one of these mills produces high-bulk, raw white acrylic yarn on cones. As well, it is only in hank form that high-bulk acrylic yarn is able to bloom and bulk up freely without any restrictions. In package dyeing, the yarn cannot shrink because it is restricted by the dye spring. As regards cost efficiency, in comparison with dyeing high-bulk yarn using the package dyeing process, hank dyeing requires fewer operations. For example, in hank dyeing, the yarn is bulked while it is being dyed, whereas in package dyeing, the bulking of the yarn is a separate operation.

On the point of substitutability, Perfect Dyeing argues that all yarns differ in terms of performance, features, fibre, hand, dyeability and price. In this regard, it is submitted that there are two key reasons why it is impossible to use a non-bulk yarn in a high-bulk application. First, if a knitter needs to produce a bulky, wooly-looking sweater, then it must use a high-bulk yarn. Second, if a knitter needs to have a product that competes in the lowest end of the market, then it can only use a high-bulk yarn.

Perfect Dyeing further argues that fibre type is one of the most important specifications for a product, and there is no compromise. Fibres such as acrylic, cotton, polyester and wool are very different from each other and cannot be substituted. As regards price, Perfect Dyeing submitted comparative pricing charts in support of the argument that the subject yarn is at the lowest end of the market.

The offer received from Dawtex to commence producing the subject yarn is argued to be a non-starter and financially unsound. As well, the price at which Dawtex has offered to sell the subject yarn to Perfect Dyeing is argued to be unacceptably high.

It is further argued that the pricing structure in the market for yarns is so wide and that the market is comprised of such a broad mixture of qualities and types of yarns that tariff relief on one textile input, i.e. the subject yarn, has no bearing on the pricing structure in the market as a whole. Further, this pricing structure will not change should tariff relief be granted. High-bulk yarn is a commodity yarn which does not compete with the yarns produced by Spinrite Inc. (Spinrite) which “feature certain performance and/or physical characteristics.” Dominion Specialty Yarns (Dominion) does not produce high-bulk yarns and, therefore, does not compete with Perfect Dyeing’s end product.

Should the tariff on the subject yarn be removed, Perfect Dyeing intends to reduce its prices to its customers by the full amount of the duty, such that its customers can be more competitive against imported finished goods and be better positioned to expand export sales. Because high-bulk, dyed acrylic yarn is highly price-sensitive, Perfect Dyeing expects that lower prices will stimulate demand. The anticipated increase in volume is expected to increase employment and further reduce unit costs, thereby enhancing profitability.

Tex-Dye , another producer of high-bulk, dyed acrylic yarn that uses the hank dyeing process, fully supports Perfect Dyeing’s request for tariff relief, on the basis that there is no Canadian supplier of the subject yarn.

Tex-Dye argues that any duty savings will be passed on to its customers, that will be in a better position to compete against imported end-use articles. According to Tex-Dye, the dyeing industry is facing severe competition from the importation of high-bulk acrylic yarns already dyed abroad in countries where wages are extremely low and at levels with which the Canadian labour force cannot compete. If tariff relief is granted, Tex-Dye expects that sales will increase, which would enhance employment and capital investment in production equipment.

Letters in support of Perfect Dyeing’s request for tariff relief were received from a number of knitters, namely, Futurama Knitting Mills (1971) Limited, Calko (Canada) Inc., Dales Canada Inc. and Reine Knitting Mills Ltd.

Dawtex produces dyed and undyed yarns comprised of acrylic, polyester, nylon and wool blends produced from imported raw fibres. Dawtex’s basic position is that the Government of Canada should not look at individual requests for tariff relief, but rather at what best serves the entire textile yarn industry in Canada. Dawtex opposes the request for tariff relief made by Perfect Dyeing and states that it can produce an identical yarn at its Mississauga, Ontario, location and that it presently produces a yarn which closely resembles the subject yarn.

Dawtex notes that it has the capability to produce 1.2 million more pounds per year and would be pleased to produce the required 1.0 million pounds of the subject yarn for Perfect Dyeing. It further submits that, if such an order were received, it would bring Dawtex’s production to almost full capacity, lower its unit fixed costs, thereby lowering its unit selling price, and increase employment by at least 30 employees.

Dawtex further argues that granting the tariff relief will enable Perfect Dyeing to import a cheaper spun product and negatively affect employment in the Canadian spinning industry. Dawtex also argues that the impact on the company can be severe, given that the hank-dyed yarns produced by Perfect Dyeing compete directly with the dyed yarns manufactured by Dawtex from pre-dyed fibres. The fragile recovery that has taken place over the last two years at Dawtex would not continue, and the very existence of the company would be at risk.

Dawtex argues that, because labour costs greatly exceed other costs throughout Europe and North America, the labour-intensive hank dyeing method is no longer economically feasible. In its view, the acquisition by Perfect Dyeing of package dyeing equipment in 1978 is an indication that hank dyeing is not a cost-efficient method in Canada.

Dawtex notes from Perfect Dyeing’s submission that the duty on a hat is 3¢ and on a sweater is 15¢. In contrast to job losses and other negative economic consequences which could result from acceding to Perfect Dyeing’s request, the duty savings for hats and sweaters are argued to be meaningless.

Dawtex argues that no guarantees were offered by Perfect Dyeing or Tex-Dye that any duty savings resulting from the granting of tariff relief would be passed on to end users. Likewise, there are no guarantees that Perfect Dyeing, Tex-Dye and the knitters will hire additional staff should tariff relief be granted.

Dawtex also argues that granting tariff relief will cause the government to abandon a lucrative source of income and expose itself to greater expense in enforcement and monitoring. It submits that tariff relief, if granted, can ultimately result in the complete loss of the Canadian textile yarn industry.

Dominion produces a variety of cotton system spun yarns (including non-bulk acrylic yarns) used in the manufacture of knit goods of the type described by Perfect Dyeing in its submission. Dominion opposes the request for tariff relief.

Dominion argues that the removal of the tariff on the subject yarn will have the effect of reducing selling prices of other yarns (including its own) competing in the same end-use markets. Indeed, high-bulk acrylic yarns are said to compete with other yarns produced using different spinning technologies, dyeing methods and fibres. According to Dominion, a price reduction of 20¢ on high-bulk, dyed acrylic yarn resulting from removal of the tariff will affect Dominion’s selling prices for competing yarns in the same magnitude and will result in an annual loss in margin, [6] putting its production of sweater yarns at risk.

Dominion submits that a 15¢ reduction per sweater and a 3¢ reduction per hat due to the removal of the customs duty represents only 1 percent or less of the respective wholesale selling prices of these items. Therefore, it doubts that a reduction of this magnitude in the wholesale price of such items can increase demand for end-use items produced from high-bulk, dyed acrylic yarn by 15 to 20 percent, as is stated by Perfect Dyeing.

Spinrite, a worsted and woolen system spinner, does not presently produce the particular type of yarn required by Perfect Dyeing, but argues that it has the ability to produce high-bulk acrylic yarns for the knitwear trade. Spinrite currently produces a low-pill, high-bulk acrylic yarn and high-bulk blended yarns of acrylic and wool for the knitwear trade. Spinrite expects to be negatively affected by the duty-free entry of the subject yarn and, thus, opposes the request for tariff relief made by Perfect Dyeing.

Spinrite notes that Canadian knitwear manufacturers purchase a wide variety of yarns from domestic and imported sources to produce goods for the Canadian and export markets. Such goods include knitted apparel made from the subject yarn and goods made by Perfect Dyeing’s customers from acrylic and acrylic blended yarns produced domestically. With the current tariff in place, the subject yarn is sold at low prices relative to the yarns that Spinrite produces. Perfect Dyeing’s imports are “commodity” yarns, while the yarns produced by Spinrite feature performance and/or physical characteristics that allow Spinrite to obtain a better selling price.

Spinrite further argues that there is an existing pricing structure in the marketplace and that yarn buyers expect certain price differentials between competing yarns. It argues that the removal of the tariff on the subject yarn will distort this pricing structure and will impose a downward pressure on other yarns produced in Canada for the knitwear trade.

Coats Canada Inc. is a manufacturer of acrylic hand knitting yarns. The company submits that acrylic hand knitting yarns imported in an unbleached state, on hanks, are classifiable in the same heading as the subject yarn and can be adversely affected if tariff relief is granted on the current product description. It, therefore, asks that the product description be amended to specifically exclude hand knitting yarns. The company suggests that this can be done by inserting a yarn count parameter that will serve to confine the coverage to machine knitting yarns only. In discussions with Perfect Dyeing, it was mutually agreed that the following wording could be used by the Tribunal to limit the scope of any recommendation for tariff relief to machine knitting yarns only: “Raw White High Bulk Acrylic in Hank Form where the single yarn is finer than 1/20 Worsted Count before dyeing.”

The CTI, which represents Canadian manufacturers of textiles, was an interested party in this investigation, but did not file a preliminary submission on Perfect Dyeing’s request for tariff relief.

The Department of Foreign Affairs and International Trade informed the Tribunal that Canada currently maintains quota restraints on yarn of acrylic staple fibre (their category 25.0), imported from Malaysia, Singapore, the Republic of Korea and Taiwan. Accordingly, this coverage includes the subject yarn classified under tariff item No. 5509.32.00.

Bilateral agreements, which provide for these restrictions, between the governments of Canada and the Republic of Korea and the Taiwan Textile Federation have been in place since 1978. The bilateral agreement between the governments of Canada and Singapore has been in place since 1979, and the bilateral agreement between the governments of Canada and Malaysia has been in place since 1980. Quota limits on acrylic staple fibre yarn were implemented to protect Canadian manufacturers from large volumes and low prices of exports from these countries.

The Department of Foreign Affairs and International Trade has indicated that it will consider ex-quota entry on textile inputs where recommendation has been made by the Tribunal to remove customs duties 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.

ANALYSIS

In this investigation, the Tribunal is concerned with the issues of, first, whether an identical or substitutable yarn is produced in Canada, second, the impact of granting tariff relief on any potential domestic producers and, finally, the net economic benefit to Canada of reducing or removing the tariff on the subject yarn.

According to Perfect Dyeing and Tex-Dye, there is no domestic production of a yarn identical to or substitutable for the subject yarn. This position was contested by Dawtex, that argued that it currently produces a yarn which closely resembles the subject yarn, albeit in cone form. The Tribunal is convinced that, in this instance, the form in which the subject yarn exists is crucial. It notes that Perfect Dyeing’s production equipment can only dye yarn in hank form and that it is only when this method is used that the yarn blooms and bulks up freely without any restrictions. In addition, the samples provided by Perfect Dyeing clearly show that high-bulk yarn cannot be dyed using the package dyeing method, as this resulted in a yarn which did not bulk as much, becoming crushed against the dye spring and unevenly dyed.

The Tribunal does not accept the argument that hank dyeing is antiquated and not cost-efficient. It found persuasive the fact that there is an abundant supply of high-bulk acrylic yarn on hanks available from mills throughout the world and that not one of these mills produces high-bulk, raw white acrylic yarn on cones. In comparison with the package dyeing process that Dawtex proposes, hank dyeing requires fewer operations. For example, in hank dyeing, the yarn is bulked while it is being dyed, whereas in package dyeing, the bulking of the yarn is a separate operation.

Having regard to the above, the Tribunal concludes that hank dyeing and package dyeing are two distinct processes that are appropriate and cost-efficient to the type of goods being dyed and that these processes are not interchangeable.

Dawtex argued that it presently produces a yarn which closely resembles the subject yarn in cone form and would be pleased to produce the required 1.2 million pounds of the subject yarn for Perfect Dyeing. However, the Tribunal notes that Dawtex’s projected price offering is some 38 percent higher than Perfect Dyeing’s average purchase cost over the last three years. Given the price-sensitive nature of high-bulk, dyed acrylic yarn, the Tribunal is persuaded that Dawtex’s offer to supply Perfect Dyeing is not financially viable.

The Tribunal found compelling the arguments raised by Perfect Dyeing that yarns differ in terms of performance, features, fibre, hand, dyeability and price. It was submitted that there are two key reasons why it is impossible to use a non-bulk yarn in a high-bulk application. First, if a knitter needs to produce a bulky, wooly-looking sweater, then it must use a high-bulk yarn. Second, if a knitter needs to have a product that competes in the lowest end of the market, then it can only use a high-bulk yarn.

Perfect Dyeing also argued that acrylic is a low-end, mass-produced, man-made fibre that is easy to care for and that other fibres, such as polyester and wool, are also very different from each other and are not substitutable. The Tribunal accepts Perfect Dyeing’s view that fibre type is one of the most important specifications for a product.

Dominion argued that high-bulk acrylic yarns compete with other yarns produced using different spinning technologies, dyeing methods and fibres and that the removal of the tariff on the subject yarn would have the effect of reducing selling prices of other yarns (including its own) competing in the same end-use markets. For its part, Spinrite argued that there is an existing pricing structure in the marketplace and that the removal of the tariff on the subject yarn would distort this pricing structure and would impose a downward pressure on other yarns produced in Canada for the knitwear trade. However, these allegations were supported by somewhat limited information. No actual selling prices to the knitwear trade were provided. Dominion provided samples of retail selling prices of sweaters made from various fibres, noting that some of these items were sold at the same price points. One such comparison was between a women’s acrylic sweater and a lambswool sweater, with both sweaters sold at the same retail price at the same retail outlet. However, such evidence does not enable the Tribunal to assess how representative these samples are of relative market prices, nor whether the acrylic sweater submitted was made of high-bulk acrylic yarn. Spinrite did not provide specific pricing data. However, it did state that Perfect Dyeing’s imports are “commodity” yarns, while its yarns feature performance and/or physical characteristics that allow it to obtain a better selling price.

In contrast to the domestic producers, Perfect Dyeing provided detailed price comparison tables for all known high-bulk and non-bulk yarns, which showed that the selling price of the high-bulk, hank-dyed acrylic yarn produced by Perfect Dyeing to the knitwear trade is much lower than that of any other type of yarn produced by the domestic producers. This evidence offers a strong confirmation that the subject yarn is indeed at the low end of the market. The price data submitted by Perfect Dyeing also show that the pricing structure in the market is wide and that the market is comprised of a broad mixture of qualities and types of yarns. On balance, the Tribunal finds it difficult to conclude that tariff relief on one textile input, i.e. the subject yarn, will have a significant bearing on the pricing structure in the market as a whole.

Given the large price differentials between the subject yarn imported by Perfect Dyeing and all other yarns produced by the domestic producers for the knitwear trade, and given the apparent differences in terms of fibre type and performance characteristics, the Tribunal is of the view that there exists very limited substitutability between the subject yarn and other yarns produced in Canada.

The Tribunal also notes that many knitters support the request for tariff relief and that Perfect Dyeing and the knitters are targeting imported finished products and not other domestic yarns as their source of growth. Tariff relief would thus allow knitters to enhance their competitiveness against imports of finished goods in the marketplace.

Therefore, other than the corresponding duty revenues foregone by the government, the Tribunal does not believe that there will be any commercial costs associated with the removal of the customs duty on importations of the subject yarn.

It is estimated that the net commercial benefits of granting the tariff relief would have been significant in the 12-month period examined by the Tribunal. [7] Should the government remove the tariff on the subject yarn, both Perfect Dyeing and Tex-Dye intend to reduce their prices to their customers by the full amount of the duty, such that their customers can be more competitive against imported finished goods and be better positioned to expand export sales. This intent has clearly been conveyed to many of their customers that have supported the request for tariff relief. Because high-bulk, dyed acrylic yarn is highly price-sensitive, Perfect Dyeing expects that lower prices will stimulate demand. The anticipated increases in volume are expected to increase employment and reduce unit costs, thereby enhancing profitability

The Tribunal believes that the removal of the tariff on the subject yarn for an indeterminate period of time is the most appropriate recommendation. Should there be any commencement of production of a yarn identical to or substitutable for the subject yarn, it is open to any party to request the commencement of an investigation under subsection 18(1) of the Tribunal’s Textile Reference Guidelines for the purpose of recommending an amendment of the order of the Governor in Council which provides tariff relief.

RECOMMENDATION

In light of the foregoing, the Tribunal hereby recommends to the Minister that the customs duty on importations of bulk, raw white (undyed) yarn of 100 percent acrylic in hank form, where the single yarn is finer than 1/20 worsted count before dyeing, for use in Canadian manufactures, be removed for an indeterminate period of time.

Anthony T. Eyton
_________________________
Anthony T. Eyton
Presiding Member


Lyle M. Russell
_________________________
Lyle M. Russell
Member


Lise Bergeron
_________________________
Lise Bergeron
Member


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

2. Vol. 129, No. 40 at 3522.

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

4. A term used in the Tribunal’s letter to Revenue Canada asking for advice, dated September 22, 1995.

5. The exact volume and value are considered to be protected information.

6. An annual estimated dollar loss was supplied, but it is protected information.

7. The estimated amount for the 12-month period ending July 31, 1995, is protected information.


[Table of Contents]

Initial publication: August 28, 1996

Case Number(s)

TR-95-012

Attachment(s)

Status

Publication Date

Wednesday, August 28, 1996

Modification Date

Tuesday, January 20, 2004