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Gildan may get caught up in U.S. election politics on Honduras tariff ruling

The Canadian Press

Gildan may get caught up in U.S. election politics on Honduras tariff ruling

3 March 2008

MONTREAL - Canadian sock manufacturing giant Gildan Activewear Inc. (TSX:GIL) could get caught in the middle of U.S. election-year politics as the Bush administration decides whether to end the company’s duty-free shipments of socks from Honduras.

A U.S. Commerce Department committee is expected to announce Friday if the exports caused or threatened to cause "serious damage" to U.S producers.

Battered American sock manufacturers and their workers have clamoured for the federal agency to reinstate tariffs that were removed after the Central American Free Trade Agreement (CAFTA) was narrowly approved in 2005.

Barring another last-minute delay, the federal agency may order 60 days of consultations with Honduras that could lead to a "safeguard" levy as high as 13.5 per cent for three years on socks from the Central American country.

"The issue is heating up in the very political climate going into the elections," Jim Schollaert, a lobbyist for U.S. domestic sock producers, said in an interview.

"It would nice if everything was decided according to statistics and the merits but the games in Washington are a little different than that."

Schollaert said U.S. producers have strong grassroots political support, in addition to a "cut and dried case on the merits."

As of November, cotton sock imports from Honduras were up almost 84 per cent for the year compared to 2006, government statistics indicated.

Imports from the tiny country rank second in the world behind Pakistan in terms of volume. They accounted for 17 per cent of global imports, up from 9.3 per cent in 2006.

Pakistan has a quarter of global imports, but China is quickly gaining ground, growing from five to 12.67 per cent in one year.

Lloyd Wood, a spokesman for the American Manufacturing Trade Action Coalition, said a series of major layoffs in southern states such as North Carolina will get the government’s attention ahead of the November elections.

"That is certainly going to put more pressure on the government to respond to those job layoffs."

Dozens of U.S. producers have written to the committee supporting the imposition of tariffs.

The administration’s efforts to extend a free-trade agreement to Colombia would be hampered in Congress if it doesn’t use a safeguard available in the CAFTA deal to protect jobs, he said.

Published reports in Washington suggested the administration may be seeking a middle ground, with the imposition of a small tariff for a short duration.

Domestic U.S. production has decreased by about 20 per cent as some 30 sock mills have closed, throwing more than 6,200 employees out of work since CAFTA came into effect.

Many of the lost jobs were at Gildan plants in North Carolina.

"Gildan is a free rider on our economy, paying very little taxes, enjoying their tax shelter in Barbados," Schollaert said.

As the largest supplier to the mass market, the Montreal-based company drives down prices, putting pressure on all sock manufacturers, he added.

Gildan is building a second sock facility in Honduras that could eventually produce 42 million dozen pairs of socks.

Opponents of the sock safeguard such as Gildan have argued that manufacturing must move from the U.S. to better compete with Asian suppliers.

"It’s Asian competition that we’re competing with, not domestic U.S. competition," Gildan CFO Laurence Sellyn told The Canadian Press in August.

Sellyn, who was unavailable for comment Thursday, has said he was confident an investigation would show that such imports are not damaging the U.S. industry and that Honduran competition is fair.

"I don’t feel concerned because there’s no doubt in my mind that the investigation would show that the U.S. sock industry was seriously impacted by Asian competition long before CAFTA, and any structural changes in the U.S. industry were the result of Asian competition," he said.

Industry analysts believe the U.S. agency is unlikely to impose tariffs.

Sara O’Brien of RBC Capital Markets said a 14 per cent tariff would impact Gildan’s EPS by seven per cent.

"But we see much of this could be offset by manufacturing efficiencies and other initiatives," she wrote in a recent report.

"We would view any share weakness on the back of tariff news as short-lived and a buying opportunity."

Gildan shares lost 5.73 per cent or $2.05 to close at $33.70 Thursday on the Toronto Stock Exchange.