Submarining

Danielle wrote this post for her blog Final Fashion about a month ago and I think it deserves greater exposure. Toward that end, she agreed to allow me to republish it here.
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One aspect of the world of apparel that I struggle to make sense of is exporting and importing. It’s something I never had much of an interest in and I’m now overwhelmed with how big a part things like quotas, tariffs and politics play in the global fashion arena.

On January 1, 2005, quotas on imports from less developed countries were removed in both Canada and the United States. Six months later, after having its market flooded with 800% more imports from China, the USA reinstated quotas on many categories of garments. Which seems odd, considering how the States championed the WTA agreement from the beginning. This means that once the quotas have been filled, an embargo stops shipments from the country in question.

Some devious types try to get around the quotas by a sneaky practice called submarining, or “transshipment”. This is where garments produced offshore are finished or relabelled in a country whose quotas aren’t restricted. Though the USA is targeting other Asian nations suspected of rerouting goods made in China, Canada is not immune to opportunistic relabeling. Not only can the quotas be usurped, but the Made in Canada label holds sufficient cachet that the goods can even receive a higher price with their new labels. With Canada’s market also flooded with imports and the apparel industry suffering, the greedy or desperate go underground, creating temporary relabeling factories to capitalize on the situation.


Relabeling used to be a hack-job, simply chopping off the label and sewing a new one on top, but with the USA increasing surveillance and spending millions of dollars to inspect imported apparel, the submariners have had to take more care – unpicking seams and carefully sewing in new labels so it is not apparent that the product has been altered.

US customs has responded with an even greater degree of investigation and surveillance – even to the point of chemically testing goods to determine their origin and physically investigating factories to determine where the goods were produced. It’s disheartening to realize that despite this great effort the deterrent for submarining is often a nominal fine absorbed as the cost of doing business.

Some fraud is not so involved – there are many cases where goods are just misrepresented on documents. This type of deception is making it more difficult for companies that legitimately manufacture in Canada to export their goods to the United States – which is unfortunate because the United States market is much larger and more lucrative than Canada’s own.

Even the small packages of made-in-Canada apparel that I deal with are getting stuck in the border backlog. For two countries with a “Free Trade Agreement” there is an awful lot of paperwork and as I am no customs broker I worry about making mistakes. As I find myself trying to understand what all of this means I am overwhelmed with the tangles of policies, opinions and documents.

Lots of it (the stuff that applies to me) is soooo boring, and some of it, like submarining, is a little juicier. Often I’m lost in semantics as I couldn’t tell you the difference between duties and tariffs. I wish there was a book written in plain language that could make all of this stuff more interesting. Much of this article was inspired by one of my favourite industry mentors whose rants really bring these topics to life. Beyond the red tape and the incomprehensible charts and graphs the decisions of our governments and the actions of our industry effect everyone’s life – whether it’s your job, your business, or what is available for you to buy.

Are quotas a good thing or a bad thing? What does the US government’s increased monitoring of apparel imports mean for the rest of us? I just don’t know… all I’m sure of is that it is “a little bit more complicated than that”.

I didn’t ask Danielle if I could print the comments that followed her post but I don’t think she’ll mind. I know these guys and I don’t think they’ll mind either since they hang out over here too.

1. Very informative. This practice was commonplace even before quotas were dropped in 2005. It started years ago with US and CDN brands wanting to have an illustrious Made In Canada label in their outerwear and outdoor apparel and they really didn’t want to pay fair local prices for it.

US Customs employs “Jump” teams to visit overseas and domestic factories to verify and inspect for evidence of transshipment. In Nov 2005, they earmarked 160 factories in Hong Kong. They found 65 “closed” or had filed for cancellation of their HK permit, 48 factories refused US Customs entry, and several of the others were currently under investigation by the Hong Kong government.

I suppose when they turn up the heat in Hong Kong or other parts of Asia, Canada might seem a little less obvious. What some apparel companies will do to squeeze every last cent out of a piece of clothing. Comment by big Irv – September 11, 2006 @ 12:25 pm

2. As a California designer…yes, quotas are a great thing. It keeps the playing field slightly level. The cost of doing business in the US is astronomical and if there weren’t quotas and monitoring agencies, us little guys would have even less hope of staying in business or starting one altogether! I am all for a free market, but if you have countries that have a lower cost to do business then you have a monopoly and consequently serious political problems…he(or she) who has the money has the power and if the person that holds the power is less than honorable, we all have problems.

It’s an interesting study, in all. The US is a world power and is also a policing agent for the world. Something as “small” as a quota on how many units of underwear can enter the country may seem innocuous, but that small practice keeps countries like Nicaragua, Guatemala and India in the global running and able to make money through exports to the US, not to mention (slightly) protecting its own citizen’s business interests to have a viable textile producing community…tho’ after “deregulation” our cotton mills took a huge dive as well as our domestic production houses. Moreover, this kind of regulation is necessary political leverage. China really and truly has it in for the US. As long as we have control over how dependant we are on their workforce for goods and services, we have a polite stalemate that will never allow them the financial leverage to attack us. I wish I new more about Canada and its place in the political/economic structure of world textile trades. Maybe you can enlighten. Comment by Andrea – September 11, 2006 @ 2:38 pm

3. Did any mention that companies that transship through Canada into the US circumvent in most cases all duties. Not only is the US Treasury being ripped off big time (hundreds of millions)but our local manufacturing industry is taking devastating hits as a result.

You see at one time, everyone knew what was going on, although not much was done to prevent it.We looked upon it with disdain, shrugged it off. Today, when factories are scaling back,closing or sending people home for lack of work, I wonder if anyone is now questioning this industry wide silence?

Here in Ontario, our Government has set up hot lines so we can report “irregularities” on someone collecting social assistance. I wonder if US Customs has a “snitch” line, as I do know most legit factories in Canada are absolutely fed up up with this damaging practice.

I can guarantee most US and CDN designers that play by the rules as well are pissed as well. Does anyone know of a reporting procedure for reporting transshipment thievery? Comment by big Irv – September 12, 2006 @ 10:07 am

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11 comments

  1. Mike C says:

    Customs is a pain in the butt. Customs duties are a travesty.

    We purchase our fabric from a mill in Taiwan. Not because its cheaper, but because they’ll actually pick up their phone, negotiate quantity and price, and then take an order. A few weeks later, fabric arrives and everyone is happy.

    With the duties, the price is the same as what I could theoretically get the fabric made in the USA for. So, why don’t I? Because US mills are no longer interested in doing actual business. Good luck getting someone on the telephone. Good luck getting sample yardage sent. Good luck getting to a price and quantity agreement. Good luck getting your order actually filled if you do all that. I have tried dealing with Every. Single. US. Circular. Knitting. Mill. without success (any of you guys reading this? If so, you should be ashamed). I have even sent some of them money and never received goods.

    So, why am I paying duties to protect them?

  2. J C Sprowls says:

    There’s always more than one factor that goes into a business decision. As Mike C illustrates, his decision is primarily related to service issues. I can see the mfg/distributor’s perspective too… they’re understaffed because so much has been outsourced.

    What’s happening, in reality, is that we’re not admitting the truth to ourselves as business owners and operators. We are not exercising foresight, and we are shirking our responsiblity to our local economy and workforce.

    This relates back to the Pedro & Charles post where these guys (I presume) were paying themselves way too much, didn’t have sufficient reserves, and could not bear the cost of goods and labor. I cannot know if this is a statement of fact about their company; but, the symptoms are characteristic.

    The result of running a business this way leads directly into the catch-22 that Mike C is the victim of (or, Susanne Patternmaker was). There is only one way out of the catch-22… and that’s cold, hard, cash. Either you need sufficient reserves (best option), or you need to compromise your company’s credit (so many ways to go bad (e.g. sell company shares, sell equipment/vital organs, borrow money, &c)).

    On one hand, I don’t agree with embargo because you find out after the fact that you “should have….” had your pieces manufactured in another country. So, there is no planning, it’s just a trip wire. The concept of distributing the work fairly is great; but, the administration, execution, and support aren’t there. The current system is a race to the finish line with the slow pokes being eaten alive. This doesn’t sound like equal distribution to me.

    I’ve had the (dis)pleasure of familiarizing myself with NAFTA and have read probably 9 cases/judgements, so far. I still have another 40-ish to go before I consider myself to have a reasonable understanding of how it impact my business model. So far, all I’ve seen is posturing (i.e. attempting to pass off sleepwear as loungewear because the loungewear quota had not been met). This is precisely what a poorly designed system forces our reputable business owners to do – and, the tricks get dirtier (i.e. submarining, &c)…

    As manufacturers, we have several choices: avoid the system, exploit the system, or work to fix it. In the case of Mike C’s scenario, I would just as easily offshore my resource if I couldn’t find a local one who wanted my business. But, to find out that my shipment was hung up in a port because India (or, whoever) has exported too much, and lose all the money I have invested… I’d probably feel rather desperate, too.

  3. Miracle says:

    Mike,

    I have the same issue that you do. In fact, I have often called Kathleen to discuss the harsh reality that as a small DE, it is much easier for me to buy fabric from a foreign mill, or converter, than it is to buy from a US mill or converter. Often, with a lower minimum. Not always a lower cost, but with a wider variety of options.

    Part of the problem is that the companies that the domestic mills often want as customers are the ones who are increasingly sending their production offshore. Once you send your production offshore, you lose the incentive to purchase your fabric domestically. Catch-22.

    I think we have operated under the implication that you need massive quantities to purchase overseas, and maybe that was the case when you had to source at trade shows where only the big guys could afford the travel and exhibition expense. But now with the internet, the tiny fabric converter in southeast Asia can now sell their yardage to the small DE in California. And they are eager to do so! :)

  4. SB says:

    Hi all,

    I haven’t been around for the last several months because I’ve been in over my head. Been reading when I can, but haven’t had time to comment. I have to chime in here.

    Our little company, as manufacturers, have been totally committed to “employing our neighbors”. But in January 2005 we made the choice to convert as much of our fabric usage to sustainable fibers as possible. It has almost killed our little company. We’ve had three (3) US organic cotton mills close in two (2) years. The only remaining substantial player in the arena (wovens) behaves just as Mike C has described his potential US vendors behaving. It’s shameful. We cut ties with them months ago. That left us with NO viable US source. We are critically low in inventory levels, even with a fabric broker who specializes in organics. So we have had no choice but to either give up on organic cotton or take our textile business overseas.

    Our first delivery from India is in December. I would *never* have moved my manufacturing business overseas for money. Not ever. And I’m not saving money, so it’s a good thing that wasn’t my goal. But I’ve done it to save my little sustainable vision.

    I feel utterly disenchanted with the US manufacturing scene. And unfortunately, even the Canadian contractors couldn’t get me out of this one.

    I am decidedly ambivalent about protectionist US policies.

  5. Diane says:

    I’m not so sure we still live in a democracy but this November I’m going to vote anyway. Now is a good time to oust the old policy makers and bring in some fresh blood. The change will do us good!

  6. Kathleen says:

    All of this brings to mind the entry I wrote about CAFTA:

    I’m having a hard time drumming up more than perfunctory sympathy for the National Textile Association. The latter by the way, is busily lobbying congress on your behalf in an effort to defeat CAFTA or the Central American Free Trade Act which only affects textile producers. Yes, I’m sure you’re gratified to know that the NTA is busily telling Congress that you’re going to ship jobs overseas because you can’t buy US made fabric. As if. Were that the case, most of you wouldn’t have produced here in the first place since you couldn’t buy fabric made here from the day you opened your doors.

    Don’t get me wrong here, I’m opposed to unfair terms of trade but protectionist legislation has always protected this industry to its detriment. Consider the alternative, had the trade faced the sort of historic competition characteristic of other industries, there is every likelihood that apparel related businesses would have evolved their practices to be more efficient…

    Bill Waddell has a piece up on Evolving Excellence along these same lines. Apparently, Penney’s has dropped Basset (furniture) as a supplier due to quality problems. Penney’s has replaced them with a Chinese vendor. Basset claims it’s over price but considering Penney’s long standing commitment to quality, I’d view Basset’s position with more than a bit of skepticism.

  7. Big Irv says:

    For you trivia buffs: the term “submarining” was coined by the Chinese who meant it to reflect shipments leaving China, quietly at night, by sea, for other destinations for redistribution. I don’t think any submarines were actually used.

    I agree with Mike C on some of the points he has made. It has been frustrating at times to efficiently order material from mills in North America.
    I find many suppliers in theory still wanting to do business, but in many cases you can tell in their hearts, many of them are just going through the “motions”, not knowing if you are a sincere long term viable client, or whether you are ordering sample yardage biding your time, before moving everything offshore.
    As well, offshore minimums are decreasing every month, so even smaller designers are treated with skepticism by some.
    I think many apparel industry suppliers and contractors have simply found it easier to throw in the towel, rather to remain and fight for business.
    What I do find encouraging though is that those that have chosen to stay and compete, are fighting back with a higher degree of customer service and follow up, lowering IMO, intial inflated prices, and improving turn times.

    Unfortunately, it seems only circular knitters are pulling up their socks, as a vast majority of woven fabric mills are long gone. I am not sure they will return. Start up costs for woven operations are considerably higher than circular or warp knitters.

    Here in Toronto, we too are left with only converters to supply us wovens. And this is very limiting. I am travelling this month to Shanghai and Korea to attend fabric shows to secure new sources. If we don’t, our outerwear output will disappear.
    This whole industry is now filled with Catch 22’s.

  8. This thread reminds me of that yucky fiber called “ramie” that cropped up in fashion some years ago. I believe it was passed off as a style choice because importers could quickly exceed the quotas for silk, and “ramie” wasn’t subject to the same constraint.

  9. Pat Lundin says:

    My comment is about submarining and knockoffs from overseas. The american craft community has been dealing with the issue of trying to get Congress to enforce the full intention of the Trade Act of 1930 which requires “County of Origin Labeling in a permanaent and indelible manner.” As folks who work in crafts know, some unscruplous business people take off the little (for example) “Made in China” stickers and pass things off as homegrown goods. It seems the same sort of thing is happening with clothing. Maybe those with an interest in fashion need to band together with the arts and crafts community to have a bigger voice in Washington DC.
    Wendy Rosen has an article about protecting intellectual property from knock-offs in Donald Clark’s book, “Making a Living in Crafts” (2006) and she says “As China’s manufacturing strength grows, Congress becomes more and more interested in helping small businesses, like craft producers, to address these issues. Artists, gallery owners, and others who support this issue are encouraged to write their senators and congressional representatives, Remind them that every time a consumer is duped we lose some of the value, integrity, and authenticity of American crafts that artists and retailers have worked so hard to achieve.”
    The arts community has an organization called the American Made Alliance. Check out their website at http://www.americanmadealliance.org This is a trade organization intended to present legislative topics of interest to the arts and crafts community. Wendy Rosen is one of the groups founders.
    The book has a lot of good info for anyone who wants to design and market their work but I was especially interested in Wendy’s great 3 page write up about protecting intellectual property (design) from being knocked off. In it she also says “The Department of Commerce’s Intellectual Property Division suggests that you register your designs with Customs in addition to your regular copyright registration with the Library of Congress. Once knocked-off you can submit a simple letter of complaint which Customs will use to creat a “Customs Block,” allowing the government to seize the knock-offs at the port of entry. Registered designs receive top priority. Don’t be shy about contacting the Intellectual Property Division of the U.S. Customs office at (202) 572-8710.”
    Regarding the American Made Alliance- Their website has some information about how particular crafts people have been affected by knock offs if you are interested.
    Pat Lundin
    Friday Harbor, WA.

  10. Babs says:

    It’s interesting to note that the US has most of the same problems we’ve experienced in Australia.

    Over the last five years (and continuing for the next 5) we’ve reduced our tariffs on textiles, clothing and footwear (TCF). As a result most of our TCF manufacturing has closed down and the bit that is left is not very competitive and Aussies aren’t that fussy as customers so a Made in Aus tag won’t always bring you exta $.

    The TCF industry that is left is run so tight that it can’t be responsive to customers.

    What’s ironic is that all the buyers who moved their ordering of finished garments to HK and China have now been gazumped by US buyers under the new FTAs who deal in much greater quantities. After a few years of buying cheaply, in about 2005, the Aussie buyers were snubbed because they no longer met much increased minimums or they were charged massive premiums for small lots. US buyers work on much greater numbers and suddenly that’s all China and HK manufacuturers cared about.

    As a result a little bit of TCF manufacturing came home. The other result is that the boutique buyers had to club together to make orders so the individuality that we once relied on our boutiques for is no longer there.

    Sad but true.

  11. J C Sprowls says:

    Dare we say that all this protectionism is forcing industries to fragment and decentralize from huge, honking, institutional behemouths?

    Does this imply there might be a rise in localized, cottage businesses?

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