European shoe manufacturers, importers and retailers have all expressed disappointment at the European Trade Commissioner Peter Mandelson’s proposal to impose «progressive» provisional anti-dumping duties on certain kinds of leather shoes that were previously subject to quotas if they were imported from China. Mandelson said last Thursday that he was recommending initial provisional duties of 4.8 percent on Chinese footwear and 4.2 percent on Vietnamese footwear, starting Apr. 7. They would be raised gradually to 19.4 percent for China and to 16.8 percent for Vietnam over a 5-month period. Certain types of athletic and children’s shoes would be excluded.
Mandelson’s proposals are not final, but the proposed levels of the duties are much lower than the 30-40 percent range that had been aired recently following the Commission’s investigation, which had reportedly been assessed at more than 50 percent when compared to the production costs in Brazil. On the other hand, the proposed two-stage implementation of the duties, which would be a first in anti-dumping cases, is viewed favorably as an effort by the Commission to smooth out their impact on European importers, most of whom have been charging prices to retailers on the assumption that there would be no duties at all. In some cases, importers have justified price increases of up to 10 percent with the higher value of the U.S. dollar, higher oil prices and rising labor costs in the Far East.
Mandelson’s proposals look like a compromise intended to minimize criticism and opposition from the member governments of the European Union, which are deeply divided on many aspects of the issue, but they have immediately drawn criticism, even from within the Commission. Members of the Commission, who are certain to discuss the matter at a meeting next Wednesday, have reportedly said that Mandelson has been overstepping his powers by making his proposals public without consulting them first and by bending the rules with the progressive duties.
The Confederation of the European Shoe Industry (CEC) and other lobbying bodies are all preparing to file statements opposing various aspects of Mandelson’s proposal in view of the next meetings of the Commission’s advisory anti-dumping committee, scheduled for March 9 and March 21. They and other interested parties will lobby intensely with their member governments to obtain a different decision by the Commission, which will have to be endorsed anyway by the European Council of Ministers six months later for the duties to become final for the next five years.
The most vocal criticism seems to concern at this stage the exclusion of children’s shoes from the proposed ruling. The exemption, which apparently was not requested from any particular interest group, would apply to all shoes of less than 24 centimeters in length, which would correspond to size 37.5, thus making it applicable also to the feet of many adults. It corresponds roughly to the British definition of children’s shoes for exemption from VAT. Mandelson said yesterday that he is proposing to exclude them as well as athletic shoes because there is no longer any significant production of these kinds of footwear in the EU, but he did not give out yet any figures on the Commission’s findings about the degree of injury sustained by European producers in any particular segment, or the absence of it.
Mandelson only said in general that European footwear production has shrunk by about 30 percent since 2001, leading to the loss of some 40,000 jobs in the sector, while domestic prices have fallen by 30 percent as well. Mandelson said he was recommending the exclusion of children’s footwear also on grounds of Community interest, referring to the fact that children need to change their shoes frequently, but one observer in Brussels alleged that Mandelson, who is British, was probably pressured by Clarks, a major brand of children’s footwear which has been phasing out most of its production operations in Europe over the last few years, shifting its sourcing to the Far East.
Regarding the so-called STAF (special technology athletic footwear) shoes that were previously exempted from the Chinese import quotas, the European Commission is now proposing to exclude from the new anti-dumping measures those that come in with an import price above €9.00 per pair, the same threshold price that has been applied to this kind of shoes since 1994 in connection with the previous import quotas.
FAIR, the recently formed European association of footwear importers and retail chains, found the €9.00 threshold “incomprehensible” as it places cost-conscious consumers at a “blatant” disadvantage. The European sporting goods industry federation (FESI), which represents the likes of Adidas and Nike in Brussels, praised the Commission for keeping the STAF exemption on, but pointed out that the new duties would nevertheless affect approximately one-quarter of all the leather footwear imported by the European sporting goods industry. Horst Widmann, president of FESI and vice president of Puma, said they would affect about 30 percent of Puma’s shoe collection, including leisure-oriented models like the Mostro and the Speed Cat.
In particular, Widmann and FESI criticized the inclusion of Vietnam, noting that it’s one of the poorest countries in the world and that EU imports of leather shoes from that country declined during 2005, while their average unit price went up. Footwear represents Vietnam’s third biggest export item, FESI pointed out. It also represents 40 percent of the shoes imported by the European footwear industry, compared with 36 percent for China, 17 percent for Indonesia and 6 percent for Thailand.
In discussing his proposals last Thursday, Mandelson insisted in no uncertain terms that the Commission had to take action in the case, partly because its investigation had uncovered “compelling evidence of serious state intervention” in the footwear sector in China and Vietnam, including cheap finance, tax holidays, land rents below market value and improper asset valuation. Mandelson argued that this kind of state intervention is leading to dumping behavior that is not acceptable under the rules of the World Trade Organization. He said the Commission welcomes signals from China and Vietnam that they are ready to address this problem.
The Commission’s investigation concerned the 12-month period ended in March 2005. Observers in Brussels found that Mandelson had been very brave in condemning Chinese state subsidies, setting an important precedent for other industrial sectors while trying to pre-empt a possible challenge by the Chinese government in the WTO against the planned anti-dumping duties. However, according to FESI, this sort of subsidies cannot be related to dumping as they have reportedly been found to affect domestic and export prices equally.
FAIR and FESI both repeated their claims that the duties will inevitably lead to higher prices for European retailers and consumers, and that they will lead to job losses along the supply chain. According to FESI, shoe prices will increase by 25 percent, with a negative impact on the overall buying behavior. Mandelson disagreed, arguing that there is a lot of margin to absorb the impact of the proposed small duties, spreading the related costs across product ranges and the distribution chain. He pointed out that the case concerns only about 9 percent of the shoes purchased by European consumers, and that the duties would add just over €1.50 a pair to an average wholesale price of €8.50 for leather shoes that retail between €30 and €100 a pair.
Mandelson said that his proposals were carefully designed to foreclose price increases for consumers and to minimize the impact on retailers. He practically repeated one of the key arguments made in a position paper recently put out by the usually silent European Confederation of the Footwear Industry (CEC), which predicted that retail prices will remain largely the same in case of even higher duties, while importers of Chinese and Vietnamese footwear will see their profit margins reduced. In support of this theory, CEC noted that actual retail prices have remained relatively stable in spite of a decrease in import prices of about 25 percent since the previous quotas on Chinese leather shoes were abolished at the beginning of 2005.
In fact, many suppliers and retailers of branded athletic footwear have reported relatively high gross margins lately, particularly in Europe, although Widmann argued that they need them to finance very high marketing costs. FAIR said its members, which together have 90,000 employees and represent about 50 percent of the footwear volume imported into the EU, have an average pre-tax profit margin of only 5 percent. Its members include big players such as Clarks, Columbia Sportswear, Deichmann, Leder & Schuh, Skechers, Vivarte and Wortmann.
FAIR has argued that more than 10,000 people in the European retail industry and others in trading and logistic companies may lose their jobs, particularly in small specialized firms, if the anti-dumping duties are enacted, but CEC has countered that many of the same people will have to deal with imports from other sources. CEC has also criticized the proposed exemption for STAF shoes, pointing out that the essential characteristics of sports shoes, their use and the customers’ perception of these products are similar now to those of various types of casual footwear, some of which are still produced in the EU.
The proposed duties may slow down the migration of shoe production from Europe to the Far East, according to our own findings. Without mentioning that, FAIR and FESI said they were sure that no manual jobs will return to the EU if the duties are implemented. Adidas, Puma and other big importers of Asian footwear like Deichmann have indicated that they have already started to move or will soon shift some production from China and Vietnam to other low-cost sources such as Indonesia, Thailand, Cambodia or India, but the establishment of new infrastructures in these countries will inevitably raise costs, and that this could translate into higher prices. Deichmann says this is particularly regrettable for German retailers, which are faced with a planned increase of 2 percentage points in the value-added tax from next Jan. 1 onwards.
Mandelson said there will be no quantitative limitations on imports of leather shoes from Vietnam and China. As previously reported, one of the options for trade protection recently discussed in Brussels was the introduction of a hybrid system of quotas and anti-dumping tariffs, where anti-dumping duties would come into force only if certain limits are overstepped. However, there will likely be some pressure for quantitative limitations or a surveillance mechanism for children’s shoes if these items will in fact be exempted from the planned duties.
Separately, in an apparent gesture of appeasement with China, the Commission proposed a few days ago to lower from 17 percent to 16.8 percent or 16.9 percent the maximum import duties applicable to various types of shoes and slippers, following the accession last year of 10 new member countries. The European Council of Ministers will have to endorse this proposal as well as any exceptional protection measures taken by the Commission.
Little could be learnt for the moment regarding the complaint lodged by European manufacturers of safety shoes about the products imported from competitors in China and India. Sources in Brussels indicate that the definition of the category has been narrowed down to protective footwear equipped with a toe cap made of metal or other solid material, after hearing the arguments made by FAIR, thus excluding all the outdoor-type boots and shoes featuring a more or less decorative toe cap made of leather or rubber. The current guess is that the European Commission will not take any action on this complaint and launch a new anti-dumping investigation, although it probably will have a hard time proving injury.
Meanwhile, there is a growing feeling that Italian shoe producers will lose their fight for mandatory labels of origin on shoes and six other types of products imported into the EU, as a majority of the 25 member governments is now opposing this measure. Another inter-governmental meeting on the issue is planned for the middle of March.
The Italian government has been retaliating in a way against the continued delays in the Commission’s action in favor of European shoemakers by asking its customs authorities to monitor more accurately the use of toxic substances in the shoes being imported from China and other Far East countries – a process that is causing major delays in the shipment of these products to Italian stores.