U.S. International Trade Commission COMMISSIONERS Daniel R. Pearson, Chairman Shara L. Aranoff, Vice Chairman Jennifer A. Hillman Stephen Koplan Deanna Tanner Okun Charlotte R. Lane Robert A. Rogowsky Director of Operations Karen Laney-Cummings Director of Industries Address all communications to Secretary to the Commission United States International Trade Commission Washington, DC 20436 U.S. International Trade Commission Washington, DC 20436 www.usitc.gov Probable Effect of Proposed Definitions for Certain Baby Socks Investigation No. 332--475 Publication 3880 August 2006 This report was prepared principally by Office of Industries Jackie Jones, Project Leader Andrea W. Boron, Deputy Project Leader Contributing Authors Kimberlie Freund Dawn Heuschel Laura V. Rodriguez Primary Reviewers Jan L. Summers, Office of Tariff Affairs and Trade Agreements Mark Paulson, Office of Industries Administrative Support Brenda F. Carroll Under the direction of Dennis Rapkins, Chief Chemicals and Textiles Division NOTICE THIS REPORT IS A PUBLIC VERSION OF THE REPORT SUBMITTED TO USTR ON AUGUST 25, 2006. ALL CONFIDENTIAL INFORMATION HAS BEEN REMOVED AND REPLACED WITH ASTERISKS (***). CONTENTS Page Executive Summary ................................................. v Chapter 1: Introduction ........................................... 1-1 Purpose and approach of the report................................................. 1-1 Product scope .................................................................. 1-2 Production process .............................................................. 1-4 Chapter 2: U.S. Industry and Trade ........................... 2-1 U.S. industry .................................................................. 2-1 Structure of the industry ..................................................... 2-1 Domestic production ....................................................... 2-1 All types of baby socks and booties....................................... 2-1 BSB 1 and BSB 2..................................................... 2-2 Description of socks and booties made by the domestic industry ..................... 2-3 Investment ............................................................... 2-3 U.S. imports................................................................... 2-4 U.S. importers ............................................................ 2-7 U.S. quotas and quota costs .................................................. 2-7 Chapter 3: Market Conditions ................................... 3-1 Market size.................................................................... 3-1 Market trends.................................................................. 3-1 Retail market composition ........................................................ 3-2 Product packaging and sales ...................................................... 3-2 Product pricing ................................................................. 3-3 Chapter 4: Findings ................................................. 4-1 BSB 1........................................................................ 4-1 BSB 2........................................................................ 4-1 Chapter 5: Position of Interested Parties ..................... 5-1 American Apparel & Footwear Association .......................................... 5-1 Gold Bug, Inc. ................................................................. 5-2 Kentucky Derby Hosiery......................................................... 5-3 Kellwood Company ............................................................. 5-4 Made in USA Strategies, LLC..................................................... 5-5 Paris Accessories, Inc. ........................................................... 5-6 Prewett Associated Mills ......................................................... 5-7 iii CONTENTS–Continued Page Box 1-1 .......................................................................... 1-3 Tables 2-1 Baby socks and booties: Estimated U.S. production, and share of total production, by type, 2005 ........................................................... 2-2 2-2 Baby socks and booties: U.S. imports for consumption, by principal sources, 2004-2005, January-May 2005, and January-May 2006 .......................... 2-4 2-3 Baby socks and booties: U.S. imports for consumption, by principal sources, 2004-2005, January-May 2005, and January-May 2006 .......................... 2-5 2-4 Baby socks and booties: Average unit values, by selected countries, 2004-2005 .......... 2-6 2-5 Baby socks and booties: Quantity and average unit values of imports, by month, for China, January-May 2006 ................................................. 2-7 2-6 China sock quota price, January to August 2006 .................................. 2-8 Bibliography Bibliography .............................................................. Bibl-1 Appendices A. Request letter from the United States Trade Representative ..................... A-1 B. Federal Register notice ................................................. B-1 C. Harmonized Tariff Schedule of the United States: Relevant pages with statistical reporting numbers for baby socks ans booties ............................. C-1 iv Executive Summary On May 26, 2006, the U.S. International Trade Commission (“Commission”) received a request from the United States Trade Representative (“USTR”) that the Commission provide advice as to the probable effect of a modification to the definition of baby socks on U.S. imports of the subject articles from China, on total U.S. imports of such products, and on U.S. baby sock producers. The USTR asked the Commission to consider the following two proposed definitions of the subject products for its analysis: Proposed Definition No. 1: For purposes of heading 6111, babies’ booties are knitted or crocheted foot coverings without an applied sole glued, sewn or otherwise affixed to the upper. These articles have bulky embellishments, such as rattles or other attachments, which preclude wearing inside of footwear. Proposed Definition No. 2: For purposes of heading 6111, babies’ booties are knitted or crocheted foot coverings without an applied sole glued, sewn or otherwise affixed to the uppers. These articles have embellishments, such as rattles, lace, appliqués, skid-proofing or kick-proofing properties. In his letter, the USTR noted that the Memorandum of Understanding Between the Governments of the United States of America and the People’s Republic of China Concerning Trade in Textile and Apparel Products (MOU), which became effective January 1, 2006, establishes annual quantitative restraints on U.S. imports of certain textiles and apparel originating in China through 2008, and that a question has arisen as to whether or not the subject articles are subject to the quantitative restraints. At the USTR’s request, this report analyzes the probable effects of the removal of certain baby socks and booties, defined above, from the quota on imports of hosiery (category 332/432/632). The Commission’s analysis indicates that removal of baby socks and booties provided for in Proposed Definition Number 1 (BSB 1) from the quota would likely have a negligible effect on the level of U.S. imports from China, on total U.S. imports, and on domestic producers of baby socks and booties. The Commission has found no evidence of U.S. production of BSB 1. U.S. importers of baby socks and booties stated that BSB 1 accounted for a small part of their total line of baby socks and booties. With respect to Proposed Definition Number 2 (BSB 2), there may be some adverse impact on U.S. imports from China, total U.S. imports, and U.S. producers. However, owing to the short time that the quota has been in effect, and incomplete data to fully assess the trends, it is difficult to assess the full effect of removing from the quota baby socks and booties as provided for in BSB 2. Based on the information available to date, it appears that the quota has had some disruptive effect on U.S. imports of baby socks and booties from China during 2006, despite the low utilization rate of the current quota to date. Reportedly, the 2006 quota was allocated to individual Chinese firms by the Government of China and covered manufacturers of all types of hosiery, including children’s and adult socks. Some importers indicated that their manufacturers in China did not obtain enough quota from the quota allocation process for the importers to meet contractual obligations with major retail accounts. Many of the largest importers reportedly either procured additional quota early in v the year, when quota costs were at their highest, and/or switched their sourcing to higher cost suppliers. There is evidence that some of the increased costs associated with the quota have been passed on to the retailers, particularly starting in the second half of 2006. To the extent that any increased costs associated with the quota are passed on to the retailers, it is possible that the removal of the subject articles from the quota could result in declining import prices and an increase in the total volume of U.S. imports. Such an increase in total U.S. imports of BSB 2 could result in an adverse effect on U.S. producers of such products, particularly small contract sock knitters, ***. While BSB 2 accounts for a relatively small share (an estimated 10 percent) of domestic production of baby socks and booties, BSB 2 are mostly sold to retailers as part of an assortment that includes other baby socks.