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To curtail quota evasion by transshipment through second countries on categories covered by quotas, new country-of-origin rules were established by the United Stares in 1985. The rules set up criteria for determining which country was truly the country of origin for incoming merchandise-and thus which country's quota was involved.
Traditionally, it had been accepted as legitimate practice for two or more foreign countries to contribute to the making of some apparel categories. For example, in the case of a knitted sweater, yarn could be spun in one country, dyed in another, knit into panels for back, front, and sleeves in a third, and then finally assembled into a garment, labeled, and exported in a fourth. Hong Kong, for instance, has functioned as the assembler and shipper for much of its knitwear, using panels knitted in main· land China.
The 1985 rules required that the country where "substantial transformation' occurred determined the garment's origin.2 this was, generally, the first manufacturing stages. In the case of garments that were cut from fabrics, the country where the cutting occurred determined the country of origin. In the case of the sweaters cited above, the sweaters came to be regarded, under the 1985 ruling, as having originated in China and would be counted against China's quota, even though Hong Kong did the finishing and shipping. The complication was that China had very limited quota, But, after all, that was the reason U.S. manufacturers had been able to secure this protection-to stop shipments that were mostly made in China.
By the 1990s, Taiwan, Hong Kong3, and South Korea had become much more advanced nations. Wages in their countries had risen, and it became increasingly difficult to find workers for their garment factories. These countries began to invest and move their own garment production to less developed, low-wage Asian nations such as Indonesia, China, Malaysia, Thailand, Bangladesh, and Vietnam. Operating under the 1985 rules of origin, if Hong Kong manufacturers cut garments in their Hong Kong factories, it could be sewed in mainland China where wages were much lower. Then, when garments were brought back to Hong Kong, they were shipped under Hong Kong quota. This strategy of sending out the cut parts to low-wage areas for the sewing operation is called outward processing trade (OPT). (Many U.S. manufacturers use a similar strategy, which will be discussed in a later section.)
Soon, however, U.S. manufacturers who opposed imports began to realize that OPT was another way of interpreting the rules to export more products to U.S. markets. The biggest concern was that the United States had very restrictive quotas on products from mainland China. However, under the OPT arrangements, a great many products were actually being made in China for shipment to the United States, bur the products were legitimately labeled as made in Hong Kong.
By 1996, U.S. country-of-origin rules were changed again to limit the OPT arrangements taking place in Asia, particularly in China. Under the new rules, the country of origin is the country in which the garment assembly occurs.
Changes in regulations such as the country-of-origin rules make a dramatic difference in how U.S. fashion firms participate in international aspects of business. A partnership with a company in another country can be working smoothly one day and changed totally by the next day. A retail buyer may suddenly discover it is impossible to do business with an established partner in china or elsewhere because the trade policies have changed.
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