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PALLISER FURNITURE LTD.

Investigations


REPORT TO
THE MINISTER OF FINANCE
REQUEST FOR TARIFF RELIEF BY
PALLISER FURNITURE LTD.
REGARDING
WOVEN CUT WARP PILE FABRICS
MAY 1, 1996

TABLE OF CONTENTS


Request No.: TR-95-014

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


Research Director: Réal Roy


Research Manager: Peter Rakowski


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.

On June 16, 1995, the Tribunal received a request from Palliser Furniture Ltd. (Palliser) of Winnipeg, Manitoba, for the permanent removal of the customs duty on importations, from all countries, of woven cut warp pile fabrics, with the pile yarns made solely of Dralon® acrylic fibres or made of Dralon® acrylic fibres mixed with pile yarns of polyester fibres, the ground fabric made from yarns of polyester filaments in the warp and yarns of a blend of cotton fibres and polyester staple fibres in the weft, the underside of the fabric being coated, for use as decorative outer coverings in the manufacture of upholstered furniture (the subject fabrics). Palliser claimed that the subject fabrics were classified under classification No. 5801.35.00.19 of Schedule I to the Customs Tariff. [2] This classification was confirmed by the Department of National Revenue (Revenue Canada).

On November 22, 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 the December 2, 1995, edition of the Canada Gazette, Part I. [3]

As part of the investigation, the Tribunal’s research staff sent questionnaires to potential producers of identical or substitutable fabrics. Questionnaires were also sent to known and potential users of the subject fabrics for use in the production of upholstered furniture and to several importers of the subject fabrics. A letter was sent to Revenue Canada requesting information on the tariff classification of the subject fabrics, and samples were 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, Palliser and other firms that responded to the questionnaires, was provided to the parties that had filed notices of appearance for this investigation.

A public hearing was not held for this investigation.

PRODUCT INFORMATION

The subject fabrics are woven cut pile fabrics produced on a double plush velvet rapier loom. This type of pile fabric is made by weaving two separate ground fabrics, one above the other, and interlacing each pile end, first with one ground fabric and then with the other. The resulting fabric sandwich is split on the loom into two identical velvet pile fabrics by a travelling knife. The subject fabrics have a width of 54 in. and typically a pile of 3/32 in. Palliser alleges that three of the subject fabrics are yarn-dyed and that one is piece-dyed. Once woven, the fabrics are finished. They are backcoated with a white cellular acrylic polymer to provide stability and are brushed to remove lint and to bloom the pile. As well, they are sheared to remove fuzz and to obtain a uniform pile.

The subject fabrics are woven in the United States. The acrylic fibres used in the pile are produced in the Federal Republic of Germany by Bayer and are sold under the Dralon® brand name. The acrylic fibres are imported into the United States, where they are spun into a single yarn. The polyester fibres and yarn used in the warp and the polyester cotton fibres and yarn used in the filling are sourced in the United States. The fact that the Dralon® fibres originate outside the NAFTA region means that the subject fabrics do not qualify for NAFTA treatment when imported into Canada from the United States.

According to Revenue Canada, the subject fabrics are classified for customs purposes under classification No. 5801.35.00.19. The subject fabrics were dutiable, in 1995, at 20.5 percent ad valorem under the MFN tariff and at 20.0 percent ad valorem under the GPT, but are free under the U.S. tariff and the Mexico tariff. On January 1, 1996, the subject fabrics became dutiable at 19.0 percent ad valorem under the MFN tariff and at 14.0 percent ad valorem under the GPT.

REPRESENTATIONS

Palliser submitted that there were no domestic producers of identical or substitutable fabrics. It indicated that it had reviewed the line of J.L. de Ball Canada Inc. (J.L. de Ball), which it alleged is the only domestic producer of woven velvet, and found no identical or substitutable fabrics in J.L. de Ball’s current designs or supply capability.

In addition, Palliser stated that its products compete with furniture that enters Canada duty-free under NAFTA. It alleged that its U.S. competitors are close to the source of their fabrics, on which they pay no duty. Furthermore, Palliser stated that there is no duty on these fabrics when they are used in the manufacture of furniture which is subsequently imported into Canada.

Other furniture manufacturers [4] that responded to the Tribunal’s questionnaires supported the request for tariff relief.

The Tribunal’s research staff sent questionnaires to all known potential producers of fabrics identical to or substitutable for the subject fabrics.

Montreal Woollens (Canada) Ltd. (MW), a producer of tufted velvets located in Cambridge, Ontario, alleged that it could and did produce fabrics substitutable for the subject fabrics. It further stated that, if tariff relief were granted, there would be a further reduction in sales of velvet fabrics, resulting in the loss of significant sales volumes and the potential loss of four jobs.

J.B. Martin Ltd., a producer located in St-Jean-sur-Richelieu, Quebec, opposed the request for tariff relief on all goods imported under classification No. 5801.35.00.19. However, it had no concern with respect to the removal of customs duties on the subject fabrics only, but did have a concern with the removal of customs duties on all goods classified under that classification number.

J.L. de Ball, located in Montréal, [5] Quebec, submitted that fabrics identical to the subject fabrics are not currently in its product line for sale to furniture accounts. However, it maintained that it had produced and sold these products in the past (most recently in 1991) and had the capability to do so again at any time. In fact, it alleged that it is now producing identical fabrics in its Canadian plant to assist a U.S. producer which is rebuilding its facilities after a major fire. J.L. de Ball also indicated that any recommendation by the Tribunal to remove the duty on the subject fabrics would seriously undermine current negotiations under NAFTA for changes to the applicable rules of origin. In its view, the Tribunal’s recommendation in this case should be postponed until there is a resolution of the NAFTA rules of origin issue. J.L. de Ball further indicated that, if tariff relief were granted without considering the impact that such an action would have on the ongoing negotiations with respect to changes in the rules of origin, its export interests would be damaged.

The Canadian Textiles Institute (CTI) represents Canadian manufacturers of textiles. In its submission, it opposed the request for tariff relief on the basis that the FTA and, subsequently, NAFTA provide manufacturers in Canada, the United States and Mexico with improved and ultimately duty-free access to one another’s market based on terms and conditions that apply to all parties. Accordingly, the CTI proposes that there be a bilateral solution to this problem using the provisions of NAFTA. According to the CTI, Canadian fabric exporters and their U.S. counterparts are affected by the rules of origin which disallow duty-free entry into the Canadian market of the U.S.-produced fabrics that Palliser is importing, on the basis that staple fibres used in the subject fabrics are imported from non-NAFTA sources. Any recommendation made by the Tribunal to grant tariff relief would solve the problem only unilaterally, to the exclusive benefit of a U.S. textile exporter and a Canadian textile importer, and Canadian exporters facing the same problem would continue to be impaired in their access to their U.S. customers. The CTI maintains that a change to the NAFTA rules of origin would provide a permanent solution to the problem giving rise to Palliser’s request. Accordingly, the CTI asked the Tribunal to suspend the investigation.

Malden Mills of Canada Ltd. (Malden), the affiliate of the U.S. producer of the subject fabrics, indicated that the request for tariff relief filed by Palliser was necessary to preserve the interests of Canadian furniture manufacturers. Malden alleged that there were no domestic suppliers of fabrics identical to or substitutable for the subject fabrics. It indicated that tariff relief would give Canadian producers more flexibility and that it supports the request for tariff relief.

In response to the written submissions of other parties, Palliser acknowledged the support for its request from a number of furniture manufacturers and noted that there was little opposition expressed by textile producers. Palliser challenged the contention of MW that the tufted velvets that it produces would be an acceptable substitute for the subject fabrics. Palliser stated that it is generally understood, in the textile industry, that woven pile fabrics are of a higher quality (and a higher price) than tufted pile fabrics. Palliser continued by indicating that the manufacturing process for woven fabrics is more complicated and that, in the United States, tufted pile fabrics of acrylic fibres are currently priced in the range of US$3.75 to US$4.00 per yard, while woven pile fabrics of acrylic fibres from Malden start at about US$4.50 per yard and average US$5.50 to US$6.00 per yard. Thus, Palliser stated that furniture manufacturers wishing to produce furniture with higher-quality fabrics choose to pay a premium of 25 percent or more for the superior woven fabrics. Palliser indicated that colour selection and fabric design are important to consumers when selecting furniture and that, in order to produce unique colours not available elsewhere, Malden dyes its own yarns. Manufacturers of tufted pile fabrics generally purchase pre-dyed yarns.

Palliser also stated that, in order to compete, the landed price would have to be close to that paid by its U.S. competitors for the same fabrics. To accomplish this, Palliser estimated that a potential substitutable fabric in Canada would need to be priced about 20 percent lower than the present duty-paid price of the subject fabrics. Palliser continued by stating that, even if it were able to use MW’s allegedly substitutable fabric, it would remain uncompetitive because it seems, from the information provided, that MW’s prices are about the same as the landed price of woven cut pile fabrics.

Regarding the CTI’s suggestion that the appropriate solution is to change the NAFTA rules of origin as they apply to textiles, Palliser maintained that this issue may be outside the mandate of the Tribunal’s Textile Reference. Palliser noted that the present NAFTA rules of origin, as they apply to the subject fabrics, actually favour Canadian manufacturers that export to the United States. Schedule 6.B.2 of Annex 300-B of NAFTA provides for tariff preference levels (TPLs), which include the subject fabrics of Chapter 58 of the Customs Tariff. In 1995, according to Palliser, 35 million square metre equivalents of fabrics from Canada could enter the United States under lower NAFTA duty rates. These TPLs were not available to potential U.S. exporters of goods to Canada (only goods in Chapter 60 qualified). Despite this advantage, and an advantageous exchange rate, only 47 percent of the available TPLs were used by Canadian exporters in 1995.

Palliser cited the benefits of tariff relief as allowing the re-introduction of the subject fabrics to the product lines of Canadian furniture manufacturers, which would provide consumers with additional choices, enable the Canadian industry to recapture market share from imports, create employment and increase tax revenues.

The Department of Foreign Affairs and International Trade informed the Tribunal that the Government of Canada does not maintain quota restraints on fabrics classified under classification No. 5801.35.00.19 and, thus, the subject fabrics are not subject to any quantitative import restrictions. Nevertheless, fabrics of this classification number are included in items 86 and 86.2 of the Import Control List. [6] Canadian importers wishing to import these fabrics from countries other than the United States and Mexico are required, pursuant to the Export and Import Permits Act, [7] to apply for an import permit. It also confirmed that a formal petition had been filed with the U.S. authorities on the issue of rules of origin with the objective of resolving the problem bilaterally.

ANALYSIS

The Minister’s terms of reference direct the Tribunal to assess the economic impact on domestic textile and downstream producers of reducing or removing a tariff and, in so doing, to take into account all relevant factors, including the substitutability of imported textile inputs with domestic textile inputs, the ability of Canadian textile producers to serve the Canadian downstream industries and a domestic versus imported price comparison. In determining whether or not to recommend tariff relief, a key consideration for the Tribunal is the extent to which tariff removal would provide net economic gains for Canada.

In assessing net economic gains, the Tribunal notes that, if tariff relief is granted, Canadian upholstered furniture manufacturers will realize significant savings when they re-introduce the subject fabrics into their product lines. These cost savings will enhance the competitiveness of Canadian furniture manufacturers and should provide economic benefits in the form of increased sales, investment, employment and tax revenues.

The Tribunal also considered the costs to the alleged producers of identical or substitutable fabrics, MW and J.L. de Ball. Regarding MW, the Tribunal accepts Palliser’s argument, which was supported by the laboratory report submitted by Revenue Canada, that MW’s fabric is a tufted velvet, as opposed to a woven pile fabric. The density of the yarn and the greater amount of yarn make the woven pile fabric heavier and more luxurious than the tufted pile fabric, resulting in a final product that is more aesthetically pleasing and more durable. This leads the Tribunal to the conclusion that the two fabrics are not likely to be direct substitutes. Therefore, the Tribunal is not persuaded that there would be any loss of revenue or profit to MW arising from the removal of duties on the subject fabrics.

With respect to J.L. de Ball, the Tribunal notes that, although it stated that it produced fabrics identical to the subject fabrics until 1991, it did not provide any pricing or costing data, nor did it indicate that the 100 percent Dralon® pile fabrics which it allegedly sells to Palliser should be considered subject fabrics. J.L. de Ball has indicated that any recommendation by the Tribunal to remove the customs duty on the subject fabrics would undermine the current negotiations under NAFTA for changes to the applicable rules of origin. Although both J.L. de Ball and the CTI have suggested that this problem be settled bilaterally, this issue is clearly outside the mandate of the Tribunal’s Textile Reference.

Given that the removal of the tariff would have a positive impact on the competitiveness of Palliser and other upholstered furniture manufacturers in the domestic market and considering that the granting of tariff relief will provide net economic gains for Canada, the Tribunal believes that it is appropriate to recommend that tariff relief be granted.

In view of the recommendation that tariff relief should be granted, the Tribunal must turn its attention to the recommended period of such relief. The Tribunal accepts that the anomaly referred to by J.L. de Ball and the CTI is best resolved through bilateral negotiations between governments. However, the Tribunal is of the opinion that this issue needs to be resolved and that, by recommending tariff relief for a period of two years, further efforts can be undertaken to resolve this problem. The Tribunal is further persuaded that temporary relief is appropriate, given the assertion by J.L. de Ball that it is capable of producing identical fabrics.

RECOMMENDATION

In view of the above information and evidence submitted to the Tribunal in this matter, the Tribunal hereby recommends to the Minister that the customs duty on importations, from all countries, of the subject fabrics be removed for a period of two years.

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

3. Vol. 129, No. 48 at 4102.

4. Dynasty Furniture Manufacturing Ltd., Sklar-Peppler Furniture Corporation, Direct Home Upholstery Ltd. and El Ran Furniture Ltd.

5. J.L. de Ball’s plant is located in Granby, Quebec.

6. Fabrics of classification No. 5801.35.00.29 originating in the United States or Mexico are not included in the Import Control List . Therefore, import permit statistics exclude trade data for these fabrics originating in the United States and Mexico.

7. R.S.C. 1985, c. E-19.


[Table of Contents]

Initial publication: August 28, 1996

Case Number(s)

TR-95-014

Attachment(s)

Status

Publication Date

Wednesday, August 28, 1996

Modification Date

Tuesday, January 20, 2004