LADY AMERICANA SLEEP PRODUCTS INC. AND EL RAN FURNITURE LTD.

Investigations

REPORT TO
THE MINISTER OF FINANCE
REQUESTS FOR TARIFF RELIEF BY
LADY AMERICANA SLEEP PRODUCTS INC.
AND EL RAN FURNITURE LTD.
REGARDING
CERTAIN STITCH-BONDED WARP-KNIT FABRICS
FEBRUARY 12, 1997

TABLE OF CONTENTS

Request Nos.: TR-95-064 and TR-95-065

Tribunal Members: Arthur B. Trudeau, Presiding Member
Robert C. Coates, Q.C., Member
Lyle M. Russell, Member


Research Director: Réal Roy


Research Manager: Paul R. Berlinguette


Counsel for the Tribunal: Heather A. Grant


Registration and
Distribution Officer: Claudette Friesen

Address all communications to:

The Secretary
Canadian International Trade Tribunal
Standard Life Centre
333 Laurier Avenue West
15th Floor
Ottawa, Ontario
K1A 0G7

INTRODUCTION

On July 14, 1994, the Canadian International Trade Tribunal (the Tribunal) received terms of reference [1] from the Minister of Finance (the Minister) pursuant to section 19 of the Canadian International Trade Tribunal Act. [2] The Minister directed the Tribunal to investigate requests from domestic producers for tariff relief on imported textile inputs for use in their manufacturing operations and to make recommendations in respect of those requests to the Minister.

Pursuant to the Minister’s reference, the Tribunal received, on February 13, 1996, requests [3] from Lady Americana Sleep Products Inc. (Lady Americana) of Dorval, Quebec, and el ran Furniture Ltd. (el ran Furniture) of Pointe-Claire, Quebec (the requesters) for the permanent removal of the customs duty on importations of stitch-bonded warp-knit fabrics, printed, consisting of a blend of viscose rayon and polyester staple fibres, stitch-bonded with nylon filament yarns, weighing more than 100 g/m² but not more than 150 g/m², of tariff item No. 6002.43.90 of Schedule I to the Customs Tariff, [4] for use in the manufacture of mattresses, box springs and upholstered furniture (the subject fabrics).

On September 25, 1996, the Tribunal, being satisfied that the requests were properly documented, issued a notice of commencement of investigation, which was widely distributed and published in the October 5, 1996, edition of the Canada Gazette, Part I. [5]

As part of the investigation, the Tribunal’s research staff sent questionnaires to potential producers of fabrics identical to or substitutable for the subject fabrics. Questionnaires were also sent to known users and an importer of the subject fabrics. A letter was sent to the Department of National Revenue (Revenue Canada) requesting information on the tariff classification of the subject fabrics, and samples were provided for laboratory analysis. Letters were also sent to a number of other government departments requesting information and advice.

A staff investigation report, summarizing the information received from these departments, the requesters and other interested parties, was provided to those interested parties that had filed notices of appearance in the investigation, thereby becoming “parties” to the proceedings. These parties are: Lady Americana; el ran Furniture; the Canadian Textiles Institute (CTI); Montreal Fabrics Corp. Ltd. (Montreal Fabrics); and Simmons Canada Inc. (Simmons).

Following the distribution of exhibits to parties, only the requesters filed a final submission with the Tribunal.

A public hearing was not held for this investigation.

PRODUCT INFORMATION

The fabrics covered by the requests are stitch-bonded warp-knit fabrics, printed on one side, consisting of a web of a blend of viscose rayon and polyester staple fibres, which has been stitch-bonded with nylon (polyamide) filament yarns. The viscose rayon represents about 55 percent of the weight, the polyester represents approximately 35 percent and the nylon accounts for roughly 10 percent. The sample of the fabric submitted with Lady Americana’s request weighed 134 g/m², while el ran Furniture’s sample weighed 131 g/m². These fabrics are used as a cover (ticking) for mattresses and box springs and as decking [6] for upholstered furniture. All production of end products is performed in-house by the requesters. The subject fabrics are cut to specific size requirements. In the case of mattresses and box springs, the material is sewn to a flange fabric which is fastened to the inner springs together with other filling materials that may be used. The unit is then closed by attaching the “topper” to the side wall. With respect to upholstered furniture, the material is sewn to adjoining fabrics.

In 1997, the subject fabrics are dutiable at 17.5 percent ad valorem under the MFN tariff and the GPT; at 2.5 percent ad valorem under the US tariff; and at 15.0 percent ad valorem under the Mexico tariff. The subject fabrics imported from the United States will enter duty-free in 1998. However, the MFN tariff will be reduced to 14.0 percent by the year 2004.

The requesters originally described the subject fabrics as nonwoven stitch-bonded fabrics, imported under tariff item No. 5603.00.99. However, for tariff purposes, Revenue Canada indicated that the subject fabrics are stitch-bonded warp-knit fabrics of tariff item No. 6002.43.90. The requesters accepted Revenue Canada’s classification of the subject fabrics for the purposes of their requests. The product description and classification suggested by Revenue Canada were incorporated in the Tribunal’s notice of commencement of investigation.

REPRESENTATIONS

Lady Americana manufactures mattresses and box springs which it sells in Canada and the United States. Lady Americana imports the subject fabrics from the United States and also purchases them from Lenrod Industries Ltd., which imports the subject fabrics from Italy.

El ran Furniture manufactures upholstered furniture, mostly chairs, love seats and sofas, which it sells in Canada and Europe. It also purchases the subject fabrics from Lenrod Industries Ltd.

The requesters claim that there are no domestic producers of identical or substitutable fabrics which meet their needs. They state that the removal of the customs duty on imports of the subject fabrics would enable them to reduce their manufacturing costs, which, in turn, would enable them to compete more effectively with imports of the finished products. They also argue that lower production costs would allow them to become more profitable, expand operations, purchase new equipment and pass on benefits to the consumer. The requesters are seeking tariff relief retroactive to September 1994.

In their final submission of December 20, 1996, the requesters submitted that the evidence on the record clearly demonstrates that there are no domestic producers of identical or substitutable fabrics which meet their needs. In this connection, the requesters pointed out that Doubletex has stated that it does not produce identical fabrics. Furthermore, the needlefelt fabrics produced by Doubletex are not substitutable for the subject fabrics, and none of the domestic users has indicated that it uses Doubletex’s fabrics for the same end use as that of the requesters. As well, Doubletex did not provide any production and sales information with respect to its allegedly substitutable fabrics to the Tribunal nor did it submit any samples of these fabrics.

The requesters further submitted that tariff relief would improve the competitive position of Canadian users vis-à-vis their US competitors. The requesters opposed the proposal put forward by Doubletex and the CTI, i.e. that the Tribunal limit its recommendation in respect of tariff relief to imports from the United States, because this would inhibit Canadian users from obtaining the subject fabrics from more competitive sources. In measuring the impact of tariff relief, the requesters submitted that the effect of a significant reduction in the cost burden for Canadian users would have a corresponding positive impact on the Canadian economy. Finally, the requesters noted that tariff relief was granted on printed, warp-knit fabrics, solely of polyesters, of tariff item No. 6002.43.90, for use as ticking in the manufacture of mattresses and mattress supports. [7] The only difference between those fabrics and the subject fabrics, it is argued, is the fibre content.

Serta Mattress Company (Serta), Division of Star Bedding Products (1986) Ltd., located in Concord, Ontario, is a manufacturer of mattresses and box springs with facilities in the United States and Canada, as well as in Puerto Rico, Spain, Mexico, Trinidad, Australia, Japan, the Republic of Korea, Taiwan, Israel, New Zealand, Saudi Arabia, the Dominican Republic, Malaysia, the Philippines, Iceland and Colombia. Serta imports the subject fabrics from a number of suppliers in the United States. Serta supported Lady Americana’s request for tariff relief and stated that paying duty on the subject fabrics, which is a significant part of the company’s raw material component, puts it at a competitive disadvantage.

Simmons, of Mississauga, Ontario, is a Canadian owned and operated company that manufactures bedding and furniture for the retail and institutional markets. Simmons also supported Lady Americana’s request and stated that there are no domestic producers of fabrics identical to or substitutable for the subject fabrics used as ticking. Simmons argued that ticking is very much a “fashion” item and that each manufacturer seeks ticking which will be unique to its products. It stated that the removal of the duty on imported ticking, regardless of source, would cause no harm to any fabric manufacturers, as none produces the ticking required by Canadian bedding manufacturers.

The Sleep Factory, of Mississauga, submitted that identical or substitutable fabrics for use in the production of mattresses and box springs are not available in Canada. The company stated that tariff relief would enable it to reduce its manufacturing costs, which, in turn, would create a greater demand for its products and that additional sales would enable it to generate more profits and expand operations.

Direct Upholstery Ltd., located in Weston, Ontario, has been manufacturing sofas, chairs, love seats, ottomans, sectional furniture and sofa beds since 1971. The company stated that identical or substitutable fabrics are not available in Canada. It supported both requests, as tariff relief would increase sales, expand the market for upholstered furniture and provide a level playing field vis-à-vis competition from foreign sources.

Furnitrad Inc., located in Saint-Hyacinthe, Quebec, manufactures upholstered furniture. Because the company sells more than half of its products in the United States and, since January 1, 1996, can no longer avail itself of the duty drawback program for its US sales, it supports all efforts to reduce or remove tariffs on the subject fabrics.

The CTI represents Canadian manufacturers of textiles. In a letter dated November 1, 1996, the CTI opposed the requests for tariff relief on the basis that Doubletex is capable of producing fabrics that compete with the subject fabrics. Notwithstanding this broad opposition, the CTI would not oppose the requests if tariff relief were granted on imports from the United States only.

Doubletex, of Montréal, Quebec, wrote to the Tribunal stating that it is Canada’s largest non-integrated weaver of fabrics and that an important part of its business is selling woven and nonwoven fabrics to the home furnishings industry, including manufacturers of mattresses, box springs and upholstered furniture. Doubletex stated that it does not produce identical fabrics. However, the company submitted that it sells polyester/cotton, polyester/rayon and polyester/nylon woven fabrics to the mattress and upholstered furniture industries. Doubletex argued that the home furnishings market, unlike the fashion apparel market, does not define itself on the basis of fabrication and that it is a market segment that substitutes fabrics and blends depending on price and availability. Doubletex pointed out that the consumer does not make buying decisions based on the precise fabric; people judge the product based on comfort, colour, cost and related features. Given the fact that the requesters import the subject fabrics from the United States, Doubletex would not oppose the requests if the Tribunal were to recommend that the tariff relief be granted on imports from the United States only. However, it opposes the reduction or removal of the MFN tariff.

Rentex Inc. and Matador Converters Co. Ltd., of Montréal, and Texel Inc., of Saint-Elzéar, Quebec, wrote to the Tribunal indicating that they did not oppose the requests for tariff relief.

Montreal Fabrics is an importer/distributor of fabrics for the bedding and furniture trade. In a letter dated October 23, 1996, the company stated that, should the Tribunal recommend tariff relief on the subject fabrics, the removal of duties on imports of polyester/cotton fabrics (classification No. 5513.41.00.30) and printed cotton fabrics (classification No. 5208.52.90.90) for use in the production of mattresses should also be considered. Montreal Fabrics stated that these fabrics are substitutable for and in the same price range as the subject fabrics.

The Department of Foreign Affairs and International Trade informed the Tribunal that Canada does not maintain quantitative import restrictions on fabrics classified under tariff item No. 6001.43.90.

Revenue Canada has indicated that there would be no additional costs, over and above those already incurred by it, to administer the tariff relief requested, should it be granted.

ANALYSIS

The Minister’s terms of reference direct the Tribunal to assess the economic impact on domestic textile and downstream producers of reducing or removing a tariff and, in doing so, to take into account all relevant factors, including the substitutability of imported textile inputs with domestic textile inputs and the ability of domestic producers to serve the Canadian downstream industries.

Although Doubletex does not produce stitch-bonded warp-knit fabrics, it submitted that it sells substitutable woven fabrics to the mattress and upholstered furniture industries. In this regard, Doubletex provided some pricing information on its polyester/cotton, polyester/rayon and polyester/nylon woven fabrics. The Tribunal notes that the landed cost of the subject fabrics imported by Lady Americana and Serta for use in the production of mattresses and box springs is generally below the selling price of the allegedly substitutable domestic fabrics when the width of the fabrics is taken into account. The landed cost of the subject fabrics (width of 61 in.) used by el ran Furniture in the production of upholstered furniture is also lower than the selling price of the allegedly substitutable fabrics (width of 60 in.) offered by Doubletex. However, Doubletex did not provide any production and sales information with respect to its allegedly substitutable fabrics nor did Doubletex submit any samples of these fabrics. This leads the Tribunal to conclude that Doubletex has not demonstrated an ability to serve the needs of the mattress and upholstered furniture industries with fabrics that are substitutable for the subject fabrics.

The Tribunal notes that Doubletex does not oppose the requests if tariff relief is granted solely on imports of the subject fabrics from the United States. However, the Tribunal finds no compelling reason to limit its recommendation in this way. The Tribunal considers that the removal of the MFN tariff allows the users to purchase the subject fabrics from the most competitive sources.

Furthermore, the requesters submitted that tariff relief would enable them to reduce their costs, which, in turn, would help them to compete more effectively with imports of the finished products. In this regard, the Tribunal notes that there are no duties on imports of upholstered furniture from the United States and that duties payable on imports of mattresses and mattress supports will be removed completely on January 1, 1998. Consequently, the Tribunal is of the opinion that tariff relief on the subject fabrics will aid Canadian manufacturers of upholstered furniture, mattresses and box springs in competing with imports of finished products from the United States, where manufacturers have access to lower input costs.

In the circumstances, the Tribunal concludes that, while there would be tariff revenues foregone by the government, there would be no commercial costs of granting tariff relief on the subject fabrics. Based on 1995 volumes and values of imports and 1997 MFN and US tariff rates, it is estimated that potential benefits for users of the subject fabrics in 1997 would be approximately $120,000. In addition, tariff relief would provide future benefits to the requesters in terms of their competitive position in the market. Accordingly, the Tribunal concludes that the net economic benefits of granting tariff relief will be positive.

With respect to the requests for retroactive tariff relief to September 1994, the Tribunal does not believe that there are extraordinary competitive circumstances in the domestic market that would warrant such a recommendation. However, the Tribunal is recommending to the Minister that the implementation of this recommendation be effective as of the date of this report.

In its representation, Montreal Fabrics stated that, should the Tribunal recommend tariff relief on the subject fabrics, the removal of the duties on certain fabrics classified under classification Nos. 5208.52.90.90 and 5513.41.00.30 for use in the manufacture of mattresses should also be considered. The Tribunal notes that the notice of commencement of investigation did not cover precisely these fabrics. It is the Tribunal’s view that expanding the recommendation to cover these fabrics would be unfair to and could prejudice persons who, on the basis of the notice, elected not to participate in the investigation on the understanding that they did not have an “interest” in it. Should a Canadian producer wish to obtain tariff relief on fabrics not covered by this report, it should file a properly documented request concerning these inputs with the Tribunal.

RECOMMENDATION

In light of the foregoing, the Tribunal hereby recommends to the Minister that the customs duty be removed for an indeterminate period of time on importations of stitch-bonded warp-knit fabrics, printed, consisting of a blend of viscose rayon and polyester staple fibres, stitch-bonded with nylon filament yarns, weighing more than 100 g/m² but not more than 150 g/m², of tariff item No. 6002.43.90, for use in the manufacture of mattresses, box springs and upholstered furniture.

The Tribunal further recommends that the tariff relief be effective as of the date of this report.

Arthur B. Trudeau
_________________________
Arthur B. Trudeau
Presiding Member


Robert C. Coates, Q.C.
_________________________
Robert C. Coates, Q.C.
Member


Lyle M. Russell
_________________________
Lyle M. Russell
Member

1. On March 20 and July 24, 1996, the Minister of Finance revised the terms of reference.

2. R.S.C. 1985, c. 47 (4th Supp.).

3. The requests were amended on August 15, 1996.

4. R.S.C. 1985, c. 41 (3rd Supp.).

5. Vol. 130, No. 40 at 2831.

6. Material used on the underside of removable cushions, chairs, love seats and sofas.

7. SOR/96-461, October 8, 1996, Canada Gazette Part II, Vol. 130, No. 22 at 2951.

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Initial publication: February 12, 1997