In anticipation of the quota-free market, many small and midsize makers embarked on expansion projects and capability upgrades to boost capacity and improve efficiency.

However, in October 2004, various textile organizations in the US filed safeguard actions capping the 2005 import growth rate of China-made woven cotton shirts and trousers
which include denim garments
at 7.5 percent. While these petitions were not yet approved as of press time, there is a high possibility of them being implemented soon.

In addition, the China government imposed an export tariff beginning Jan. 1, in an attempt to prevent the US from implementing these safeguards. Exports in some apparel categories, including denim garments, are now being taxed by volume at US$0.02419 to US$0.06049 per item per kilogram.

The export tariff is also a means of encouraging suppliers to manufacture more upscale designs instead of flooding the market with cheap, low-end products.

The new levy is estimated to increase costs by up to 6 percent. Suppliers are mainly concerned about orders that were confirmed in 2004 and are scheduled for shipment this year. In most cases, the confirmed price is too low to compensate for the export tax and still yield sufficient profit. This problem is not an issue for most large companies, who are banking on increased orders as a result of quota removal to offset the profit loss. It is also not a concern for suppliers who were aware of the impending tax months before it was implemented and were able to renegotiate contracts with clients.

For new orders too, whether or not this additional expense will be passed on to buyers depends on the size of the company.

Large manufacturers that produce midrange and high-end designs have more room to absorb these additional costs and, with the stabilizing cost of cotton, can even drop denim garment prices a bit. Also, companies with vertically integrated facilities will be able to absorb the increased tax and keep prices stable.

However, small and midsize suppliers
especially those who purchased additional machinery to boost manufacturing capacity and become more competitive in the quota-free market
will be hit hard by the new tax. Many of them might not be able to recover investments made in new equipment, not only due to the additional export tax, but also because looming US import caps may curb export growth.

Most of these companies focus heavily on basic, low-value garments that yield wafer-thin margins. And with competition becoming more intense now, these small and midsize companies cannot afford to increase prices of their products, as doing so would essentially result in lost export orders and could subsequently risk their very survival.

All of these factors have placed these companies in a precarious situation. Many have already started looking at ways to cut production costs and some will undoubtedly even resort to cutting corners. Some suppliers will use 8oz denim, for example, to produce a garment that has to be made from 8.5oz denim.

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