The Complexity of Fabric Classification

I picked up an Emilio Pucci scarf recently and have been enjoying learning about all of the different ways of wearing it. Its size is approximately 3 ft x 3 ft and while I bought it to wear as a cover up on the beach, I’ve been discovering its many variations as a shawl and scarf.

While wearing it the other day in my office, I found myself researching fabric issues and I couldn’t help but think about how appropriate it was given that I was wearing a large (and gorgeous) piece of cloth!

The issue I was looking into had nothing to do with the material of my new accessory but rather that of bonded fabrics and the identification of where nuances arose as between the general rule on bonded fabrics and “pile” fabrics. I was also trying to determine if there were any differences when the fabric was knit versus crocheted.

Finding this answer required an analysis of the Textile Section Notes of the tariff (Harmonized Tariff Schedule of the United States, “HTSUS”) and in particular, Chapters 59, 60 and 61. Let me explain how the tariff is organized.

The tariff is arranged by Section which generally categorizes similar merchandise. It has titles such as “Vegetable Products,” (Section II), “Plastics and Articles Thereof, Rubber and Articles Thereof” (Section VII), and “Footwear, Headgear, Umbrellas, Sun Umbrellas, Walking Sticks, Seatsticks, Whips, Riding-Crops and Parts Thereof; Prepared Feathers and Articles Made Therewith; Artificial Flowers; Articles of Human Hair” (Section XII).

At the beginning of each Section are “Notes” unique to all of those Chapters within the Section. Similarly, in the first part of each Chapter are Notes specific to the tariff provisions within that Chapter, along with Additional U.S. Notes that are unique to imports coming into the United States.

With regards to “Textile and Textile Articles,” the tariff provisions for these types of imports are found in Section XI, Chapters 50 through 63.

Making determinations on fabrics can be tricky due to reasons such as the type of combination of fibers, if such fibers had been brushed or cut during the processing thereby creating a “pile,” if fabric is adhered to another type of fabric, or if fabric has been coated or impregnated with a medium that contains varying percentages of a rubber and plastic combination.

The methodology for the classification of goods under the HTSUS is governed by what are known as the General Rules of Interpretation (GRI). The first GRI provides that classification determinations are made in accordance with the terms of the headings of the tariff schedule and any relevant Section or Chapter Notes.

Coming back to bonded fabrics, Note 2 to HTSUS Chapter 59 (entitled, “Impregnated, coated, covered or laminated textile fabrics; textile articles of a kind suitable for industrial use”) provides a general rule for bonded fabrics, stating that where a knitted or crocheted fabric is coated, impregnated, laminated or covered, then it would be classified in HTSUS Chapter 59.

Despite this general rule however, Note 1(c) to HTSUS Chapter 60 (entitled, “Knitted or crocheted fabrics”) sets forth an exception to this rule where the imported merchandise involves a knit pile fabric that is coated, impregnated, laminated or covered. Under this circumstance, these fabrics are classifiable within Chapter 60, under Heading 6001, and not under Chapter 59.

Moreover, Additional Legal U.S. Note one (1) to HTSUS Chapter 60 provides a specific definition for the term “long pile fabrics.” As defined, these are “fabrics made by inserting fibers from card silver into the loops of the ground fabric during knitting.” In everyday language, this simply means that a certain manufacturing process must have been utilized in order to qualify under this provision.

Needless to say, making classification determinations can sometimes seem like solving a puzzle as multiple Chapters and Notes need to be analyzed before any conclusions can be drawn.

Questions/comments? Post below or email me at clark.deanna@gmail.com

The Fashion Industry and Accountability for the Basic Human Rights of Foreign Laborers

Fall 2011 New York Fashion Week which has just wrapped up here in NYC, has increasingly brought more issues to the forefront, including the currently trendy dialogue around “sustainable fashion” along with the well known - yet still undealt with - issue of eating disorders that many models struggle with.

One lesser known and far less glamorous issue has to do with foreign labor in the fashion industries. Textiles, and hence apparel, are made primarily overseas using labor that is less expensive than could be found in the United States. That obviously is no secret, however, disproportionately high working hours, wages that barely cover the rent let alone providing an adequate standard of living, hazardous working conditions, child labor and forced labor are all realities that exist in the industry as well.

Designers or license holders who rely on foreign labor to manufacture products with their logos on it (see my previous post for an explanation about licenses, license holders and royalties) have, in my view, a duty of accountability to ensure basic human rights towards laborers all the way down the line back to the factory.

This concept of importer oversight “down the line” is not unusual within the international trade community. An example of this is US Customs C-TPAT (Customs-Trade Partnership Against Terrorism) program, which causes importers to “vet” their supply chain for security purposes all the way back to the factory in exchange for a more expeditious customs clearance. As a result of this program, changes to factories such as adequate ventilation, locks on doors and basic sanitation upgrades have been implemented due to an importer’s demands that such changes be put into place.

While industry standards grossly lack foreign labor accountability, I am pleased to report that some licensor’s do in fact, require not just those licensee’s who import products with their logos to maintain certain labor standards, but they likewise require that those importers have their manufacturers agree to these terms as well.

To give you an idea of some of these contract terms that protect laborer rights and attempt to provide an “ethical code of conduct” if you will, here are some sample clauses below:

* Child Labor: Licensee and its Suppliers will not purchase products or components thereof manufactured by persons younger than fourteen (14) years of age or younger than the age of completing compulsory education in the country of manufacture where such age is higher than fourteen (14). Licensee and its Suppliers further acknowledge and agree that they will not use any child labor in the manufacturing, packaging or distribution of Licensor merchandise. In no case shall any child younger than fourteen (14) years of age or younger than the age of completing compulsory education in the country of manufacture where such age is higher than fourteen (14) be employed in the manufacturing, packaging, sales or distribution of Licensor merchandise.

* Forced Labor: Licensee and its Suppliers will not purchase products or components thereof from suppliers that use forced labor, prison labor, indentured labor or exploited bonded labor, or permit their suppliers to do so. Licensee and its Suppliers acknowledge and agree that they will only employ persons whose presence is voluntary and that they will not utilize any forced or involuntary labor, whether prison, bonded, indentured or otherwise.

* Contract Labor: Licensee and its Suppliers shall not use workers obligated under contracts which exploit them, which deny them the basic legal rights available to people and to workers within the countries in which they work or which are inconsistent with the principles set forth in this Code of Conduct Legal and Ethical Business Practices: Licensee and its Suppliers must fully comply with all applicable local, state, federal, national and international laws, rules and regulations including, but not limited to, those relating to wages, hours, labor, health and safety, and immigration.

* Work Hours: Licensee and its Suppliers shall not require their employees to work more than the limits on regular and overtime hours allowed by the law of the country of manufacture. Except under extraordinary business circumstances, Licensee's and its Suppliers' employees shall be entitled to one (1) day off in every seven (7) - day period. Licensee and its Suppliers must inform their workers at the time of their hiring if mandatory overtime is a condition of their employment. Licensee and its Suppliers shall not compel their workers to work excessive overtime hours.

* Wages and Benefits: Licensee and its Suppliers recognize that wages are essential to meeting employees' basic needs. Licensee and its Suppliers shall pay employees at least the minimum wage required by local law regardless of whether they pay by the piece or by the hour and shall provide legally mandated benefits.

* Overtime Compensation: Licensee and its Suppliers' employees shall be compensated for overtime hours at such premium rate as is legally required in the country of manufacture or, in countries where such laws do not exist, at a rate at least equal to their regular hourly compensation rate.

* Freedom of Association: Licensee and its Suppliers shall recognize and respect the right of employees to freely associate in accordance with the laws of the countries in which they are employed.

* Nondiscrimination: Licensee and its Suppliers shall not subject any person to discrimination in employment, including hiring, salary, benefits, advancement, discipline, termination or retirement, on the basis of gender, race, religion, age, disability, sexual orientation, nationality, political opinion, or social or ethnic origin.

* Harassment or Abuse: Licensee and its Suppliers must treat their employees with respect and dignity. No employee shall be subject to physical, sexual or psychological harassment or abuse.
Licensee and its Suppliers acknowledge and agree not to use corporal punishment or threats of violence.

* Health and Safety: Licensee and its Suppliers shall provide a safe and healthy working environment to prevent accidents and injury to health arising out of, linked with, or occurring in the course of work or as a result of the operation of employer facilities. Licensee and its Suppliers further acknowledge and agree that they will comply with all applicable workplace conditions, safety and environmental laws.

Clauses like these are an illustration of a movement in the right direction, however, much more can be done to prevent incidents of child labor, such as by providing the parents with livable wages.

Questions/comments? Post below or email me at clark.deanna@gmail.com

Royalties or Royalty?

Who is royalty? In the eyes of US Customs, no one is royalty.

And, despite the upcoming marriage of Prince William and Kate Middleton for which I recently saw had no “price tag” despite England’s weakened economy, this blog post is not about royalty, but royalties. (Ah, shucks… I know)

What are royalties? Generically speaking, a royalty is a fee paid by a party (known as a “licensee”) for usage of another’s (licensor’s) right. An example of this would be a payment made by an apparel importer (the licensee) for use of the recording artist “Justin Bieber’s” image on a t-shirt it imports. For those of you who don’t know, Bieber is a young Canadian R&B pop singer who is very popular with “tweens” – at least that’s what I’ve been told!

In this example, either Bieber, who is presumably the exclusive license holder, or the company that has merchandising rights relating to the use of his name or “likeness,” (which in everyday language essentially means, his image) would be entitled to payment – normally a percentage of the sales price of the good – upon the sale of the t-shirt. The terms setting forth what amount will be paid varies, and can run the gamut from 2% to 16% or much more.

So what do royalties have to do with international trade?

When it comes to figuring out how much to pay in duties, “transaction value” is one method (the preferred one actually) to use for determining an amount. As provided in 19 USC 1401a(b)(1),

“The transaction value of imported merchandise is the price actually paid or payable for the merchandise when sold for exportation to the United States, plus amounts equal to -. . . Any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States . . . .”

Therefore, under certain circumstances (not all – it depends on the nature of the licensing agreement and the relationship of the buyer, seller, and license holder), royalty amounts should be added to the transaction value. To determine the dutiable status of royalties, two (2) factors should be examined:

(1) Whether the buyer was required to pay them as a condition of sale of the merchandise for exportation to the United States, and

(2) To whom and under what circumstances they were paid.

Payments made by the buyer to a third party (i.e., not the seller or a company related to the seller either usually) for the right to distribute or resell the imported merchandise will not be added to the "price actually paid or payable" for the imported merchandise if the payments are not a condition of the sale of the merchandise for exportation to the United States.

And just what is a “condition of sale?”

To figure this out, the initial questions to answer this inquiry should be:

1) Whether the imported merchandise was manufactured under patent;

2) Whether the royalty was involved in the production or sale of the imported merchandise, and;

3) Whether the importer could buy the product without paying the fee.

Given that licensing agreements are all written differently and can involve multiple related and unrelated parties using various payment structures, figuring out the dutiability of royalty payments is not necessarily a “cut and dry” issue. In fact, it can be quite complicated.

For more reading on US Customs rules regarding transaction value, check out their Value publication.

Questions/comments? Post below or email me at clark.deanna@gmail.com