H.D. BROWN ENTERPRISES LIMITED

Investigations

REPORT TO
THE MINISTER OF FINANCE
REQUEST FOR TARIFF RELIEF BY
H.D. BROWN ENTERPRISES LIMITED
REGARDING WOVEN FABRIC, PLAIN WEAVE, OF POLYESTERS MIXED SOLELY WITH COTTON
JULY 17, 1997

TABLE OF CONTENTS

Request No.: TR-96-007


Tribunal Members: Arthur B. Trudeau, Presiding Member
Patricia M. Close, Member
Lyle M. Russell, Member


Research Director: Réal Roy


Research Manager: Anis Mahli


Counsel for the Tribunal: John L. Syme


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, on October 25, 1996, the Tribunal received a request from H.D. Brown Enterprises Limited (H.D. Brown) of St. George, Ontario, for the removal, for an indeterminate period, of the customs duty on importations of polycotton fabric, for use in the manufacture of car covers (the subject fabric).

On February 20, 1997, the Tribunal, being satisfied that the request was properly documented, issued a notice of commencement of investigation, which was distributed and published in the March 1, 1997, edition of the Canada Gazette, Part I. [3]

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

A staff investigation report, summarizing the information received from these government departments, H.D. Brown and firms that responded to the Tribunal’s questionnaires, was provided to interested parties that had filed notices of appearance for this investigation. These parties are H.D. Brown, the Canadian Textiles Institute (CTI) and Doubletex.

A public hearing was not held for this investigation.

PRODUCT INFORMATION

In the notice of commencement of investigation, the subject fabric was described as woven fabric, plain weave, of polyesters mixed solely with cotton, of a weight not exceeding 105 g/m2, of subheading Nos. 5407.91, 5513.11 [4] and 5513.21, for use in the manufacture of covers for motor vehicles.

Revenue Canada analyzed the samples of the subject fabric provided by H.D. Brown and concluded that the fabric is woven from single yarns of a blend of polyester staple fibres and cotton fibres. The polyester staple fibres represent 65 percent of the sample weight and the cotton fibres, 35 percent of the sample weight. The fabric weighs 100 g/m2 and, for customs purposes, the subject fabric is classified in subheading Nos. 5407.91 and 5513.21 of Schedule I to the Customs Tariff. [5]

The subject fabric is dutiable in 1997 at 17.5 percent ad valorem under the MFN tariff; at 2.5 percent ad valorem under the US tariff; and at 15.0 percent ad valorem under the Mexico tariff.

Subsequent to the commencement of the investigation, H.D. Brown agreed to narrow the end use for the subject fabric, from “covers for motor vehicles” to “covers for cars, minivans and trucks.”

According to Statistics Canada, in 1996, total imports of polycotton fabric which is classified in subheading Nos. 5407.91, 5513.11 and 5513.21, amounted to 2.7 million kg, with an estimated value of $16 million. The major proportion of this volume was imported for the manufacture of end products other than automotive covers; H.D. Brown’s share of this total volume was negligible. The majority of these imports originated in the United States, the People’s Republic of China, Pakistan, Italy and Indonesia.

REPRESENTATIONS

H.D. Brown submits that it is the sole manufacturer of the specified end product made from the subject fabric. H.D. Brown uses the subject fabric in the manufacture of automotive covers (for cars, minivans and trucks) at its production facility in St. George. It also produces the same range of automotive covers in “Tyvac” and “Evolution 4” (materials made from 100 percent polypropylene).

H.D. Brown contends that it had imported the subject fabric for almost a decade before it began, in 1995, to supplement its imports of the subject fabric with a substitutable fabric from Doubletex because of cash flow problems, delivery problems and fluctuating spot prices. H.D. Brown indicates that it has not purchased any substitutable fabric from Consoltex Inc. (Consoltex) or Dominion Industrial Fabrics Company (DIFCO), both of Montréal, Quebec, since 1995.

H.D. Brown states that, although substitutable fabrics are available from Canadian suppliers, including Doubletex, their price points are not competitive with those of the subject fabric. It further contends that, without tariff relief, the low margins resulting from having to use a substitutable domestic fabric will not justify the continuing operation of H.D. Brown’s production line of polycotton automotive covers.

H.D. Brown disagrees with the CTI that polycotton covers occupy the upper end of the automotive cover market. H.D. Brown submits that automotive covers made from non-woven fabrics command higher prices in the marketplace, because they offer superior protection qualities, such as water-repellent finish, breathable material and ultraviolet stability, while polycotton automotive covers are marketed as an entry level/opening price point product which provides only protection against dust.

Concerning the extent of H.D. Brown’s participation in the domestic market for polycotton automotive covers and the export opportunities that it could have in the US automotive cover market, H.D. Brown submits that the CTI submission on these matters does not reflect the realities of those markets. According to H.D. Brown, it continues to experience, in the domestic market, downward pressure on its selling prices from lower-priced imports. Similarly, H.D. Brown does not export to the US market, because the prices at which mass merchandisers such as Wal-Mart sell their imported polycotton automotive covers from the People’s Republic of China and other developing countries make it impossible for H.D. Brown to penetrate that market.

With respect to Doubletex’s submission, H.D. Brown states that the Tribunal should ignore it, because it deals with speculative issues and does not provide any concrete data for a comparative analysis.

Finally, H.D. Brown submits that tariff relief would allow it to meet price competition from offshore polycotton automotive covers, keep its production of automotive cover line in operation and prevent the layoff of 13 employees located in a region already plagued with high unemployment.

Doubletex is Canada’s largest, non-integrated fabric converter. Doubletex finishes polycotton fabrics imported from around the world. [6] The majority of its production of polycotton fabric is sold to the apparel trade, while a small volume is used to produce automotive covers.

Doubletex opposes the request for tariff relief because it considers H.D. Brown to be an important customer and has taken all the measures to meet the latter’s needs. Doubletex adds that it customizes the fabric it sells to H.D. Brown by offering a special width (183 cm) with a unique glaze and water-repellent finish. Doubletex submits that it is the only domestic producer that produces a substitutable fabric for the specified end use.

Doubletex indicates that the price comparison in the staff report is incomplete, because it does not take into account the non-monetary benefits such as financial and order cycle terms and just-in-time delivery offered by Doubletex. With respect to the provision for loss of employment made in the cost/benefit analysis included in the staff report, Doubletex indicates that it ignored Doubletex’s claim concerning lost jobs at its own plants should tariff relief be granted.

Doubletex suggests that H.D. Brown should not take the position that tariff relief is the only solution to its one client dependency problems. Doubletex adds that H.D. Brown must diversify its customer base at home and should export to the US market.

Doubletex is concerned that, if the Tribunal extends tariff relief to H.D. Brown, every Canadian user of domestic polycotton fabric would then be eligible for the same treatment. The resulting costs to Canadian weavers and converters, according to Doubletex, would be hundreds of jobs and millions of dollars in lost business.

The CTI opposes H.D. Brown’s request for tariff relief because it submits that three of its members, Consoltex, Doubletex and DIFCO, have identified themselves as producers of fabrics identical to or substitutable for the subject fabric.

The CTI submits that the evidence before the Tribunal proves that availability of a substitutable domestic fabric is not an issue in this case. The CTI adds that there are at least three companies which have supplied H.D. Brown with fabrics for use in the production of covers for cars, minivans and trucks. Doubletex, for example, has demonstrated that it is able to produce a fabric that can compete effectively with the subject fabric. According to the CTI, competitiveness entails more than just an arithmetic comparison of laid-in prices. Finally, the CTI contends that, in comparing the selling prices of Doubletex’s fabrics with those of the subject fabric, the Tribunal should consider the non-monetary benefits that take the form of added value, such as quality of fabric, order cycle, financial terms and just-in-time delivery.

The CTI submits that the subject fabric is a non-prime fabric; because it is a non-prime fabric, it is typically sold at below the production costs and should not be used as a basis for price comparison or justification for tariff relief. As far as Consoltex is concerned, the CTI suggests that the Tribunal should not expect this producer to provide a continuous supply of prime fabrics at non-prime prices.

With respect to the domestic market for automotive covers, the CTI is at a loss to understand why, in the Canadian Tire catalogue, automotive covers from non-woven fabrics command higher prices than those made from polycotton woven fabrics.

The CTI disagrees with the cost/benefit model used in the staff report, because: (a) it does not account for Consoltex’s concerns about the repercussion of tariff relief on the non-subject fabric cover market; (b) it considers, as unsubstantiated speculation, H.D. Brown’s statement that, without tariff relief, Canadian polycotton automotive cover production will cease; and (c) it does not properly take into account H.D. Brown’s allegedly overstated payroll and profit/loss data.

ANALYSIS

The terms of reference direct the Tribunal to evaluate the economic impact that reducing or removing a tariff would have on domestic textile producers and downstream producers and, in so doing, to consider all relevant factors, such as the substitutability of the subject fabric with a domestic fabric, the ability of domestic fabric producers to serve the Canadian downstream industries and the competitiveness of those downstream industries at home and abroad. Consequently, the Tribunal’s decision to recommend tariff relief is based on the extent to which it considers that such tariff relief would provide net economic gains for Canada.

On the basis of the evidence on file, the Tribunal is satisfied that a fabric substitutable for the subject fabric is produced in Canada in sufficient quantities to meet the needs of H.D. Brown. In fact, the evidence shows that, in 1995 and 1996, H.D. Brown purchased significant volumes of a substitutable fabric from Doubletex for use in the production of automotive covers.

H.D. Brown, while acknowledging the existence of Canadian production, nevertheless requested tariff relief, stating that using the domestic fabric, which commands a higher price than the subject fabric, adversely affects the profitability of the polycotton automotive cover line. H.D. Brown further submitted that, if tariff relief is not granted, high fabric prices, either of foreign or domestic origin, will force it to close down the production line of polycotton automotive covers because it will be uneconomical to continue producing these covers in Canada.

With respect to price, H.D. Brown submitted that the price of the domestic product is much higher than that of the subject fabric. A comparison of H.D. Brown’s pricing data indicates, however, that, while there is a marked difference between these prices, when the better quality and the non-monetary benefits which H.D. Brown enjoys when purchasing a substitutable fabric from Doubletex are factored in, the price differential becomes much less pronounced in favour of the subject fabric.

The Tribunal notes that, despite its higher price, H.D. Brown has continued to purchase large volumes of a substitutable fabric from Doubletex. This practice would likely not continue if tariff were removed. Moreover, other than contending that it would close down its production line of polycotton automotive covers if tariff relief were not granted, H.D. Brown did not submit any concrete evidence in support of this contention.

In assessing the net economic costs/gains for Canada, the Tribunal notes that the estimated direct benefits of granting tariff relief, based on the 1996 volumes of imports of the subject fabric, would be less than $85,000 per annum. This figure is based on the duties payable, under the MFN tariff, for the subject fabric, and assumes no further changes to the import volumes and prices estimated for 1997. However, the evidence is clear that the costs which would be incurred by the domestic textile industry, should tariff relief be granted, would be greater than $85,000 per annum. These costs, as estimated by the Tribunal, would take the form of reduced revenues as a result of lost sales in favour of offshore suppliers of the subject fabric.

In summary, the Tribunal finds that the domestic textile industry produces a fabric substitutable for the subject fabric and that the net economic costs of granting tariff relief would be greater than the economic benefits of granting relief to H.D. Brown. Removing or reducing tariff protection presently available to domestic producers of substitutable polycotton fabrics, in this particular instance, could adversely affect their market opportunities.

Because the removal of tariff would result in tangible costs to the domestic textile industry, the Tribunal believes that tariff relief would not provide net economic gains for Canada. Therefore, the Tribunal recommends that tariff relief not be granted.

RECOMMENDATION

In light of the above information and evidence before the Tribunal in this matter, the Tribunal hereby recommends to the Minister that tariff relief not be granted on importations from all countries of woven fabric, plain weave, of polyesters mixed solely with cotton, of a weight not exceeding 105 g/m2, for use in the manufacture of covers for cars, minivans and trucks.

Arthur B. Trudeau
_________________________
Arthur B. Trudeau
Presiding Member


Patricia M. Close
_________________________
Patricia M. Close
Member


Lyle M. Russell
_________________________
Lyle M. Russell
Member

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

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

3. Vol. 131, No. 9 at 683.

4. Subheading No. 5513.11 was included in this investigation by the Tribunal for the end use specified in the request to cover greige fabric imported by Doubletex for converting in Canada.

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

6. See Report to the Minister of Finance: Request for Tariff Relief by Lingerie Bright Sleepwear (1991) Inc. Regarding Printed Polycotton Woven Fabric, Canadian International Trade Tribunal, Request No. TR-95-005, March 6, 1996.

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Initial publication: July 17, 1997