denim garment export industry is currently on
unstable ground, facing the year ahead with cautious
optimism. Among the major concerns for suppliers
today are a government-imposed export tax, intense
post-quota competition prohibiting makers from
increasing export prices and potential US safeguards
that threaten to stunt export growth.
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
at 7.5 percent. While these
petitions were not yet approved as of press time,
there is a high possibility of them being
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
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
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
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