Saturday, April 14, 2007

Caught in the Battle over Bananas and Beef

The Clinton Administration's retaliatory tariffs on European luxury goods are rebounding on small American importers
The fate of many small businesses in the U.S. and abroad seems to be hanging by a thread -- in some cases, a very fine, cashmere thread. Whether to add Scottish cashmere, among other luxuries, to the list of European Union imports subject to a 100% U.S. tariff is holding up the release of the latest Euro-import hit list by the Clinton Administration.

If cashmere is added, "It will be the death knell, no question, for some of us," says Kirsten Ferguson, director of marketing for Clan Douglas Ltd. in Hawick, Scotland's cashmere capital. The Scottish cashmere industry has already been hit hard in the last few years by a flood of less expensive, Chinese cashmere in the market.

As part of a trade fight with the European Union, for the last 18 months, the U.S. has slapped 100% tariffs on a load of so-called luxury goods. Every six months, items will be added or deleted from the list, which currently includes canned fruit juices, batteries, linens, bath salts, chicory, some meats and cheeses, and Louis Vuitton handbags. The punitive tariffs, designed to nearly halt U.S. imports of those items, are meant to cost the Europeans $300 million annually in lost exports, as retaliation for the EU's policy on banana and beef imports, which hurt some U.S. exporters.

"NUTTY." Trouble is, many of the people being punished are small-business owners, on both sides of the Atlantic, who have nothing to do with beef or bananas. The tariff has already rung the knell for Reha Enterprises in Summerville, S.C., a small importer of European bath salts. After paying the extra tax for a year, Rick Reinert closed his business last spring and is still paying off his tariff debt.

"It's so nutty. How can the government do this?" asks Andi Christian of Kneipp Corp. in Northvale, N.J., a distributor of bath and body products made in Germany. Kneipp Herbal Bath, sold nationwide here, accounts for 70% of her sales. The duty she had to pay on it went from 4.9% to 100% in March, 1999.

Someone else's trade battle has cost her company "$137,000 minimum," Christian says. She paid extra freight and is paying storage fees to have some of her goods shipped to Canada rather than pay the tariff. The parent company in Germany, Kneipp-Werke, moved some of its production to the Netherlands, which isn't a member of the EU, so the American distributor wouldn't have to pay the tariff on those goods. But the packaging had to be redesigned and relabeled, adding to costs.

"COLLATERAL DAMAGE." "We tried many different ways, within the law, of skirting the duty," says Christian. She was part of a small group of business owners who went to Washington in May to plead their case to members of Congress and a representative from the U.S. Trade Office. Nothing happened.

Lately, she has read news reports that bath salts won't be on the new tariff list, which has been delayed since June while Washington and the EU wrangle over trade policy, but no one in Washington will tell her for certain. "Everything is on hold," Christian says. "Why would they punish small businesses like this?"

Nobody knows what's going to be on the list until it's issued, says a spokeswoman in the office of U.S. Trade Representative Charlene Barshefsky. "Every effort is made to hurt European exporters rather than American importers, but of course there will be some collateral damage," she says.

BLAIR APPEAL. The idea behind the tariffs, sanctioned by the World Trade Organization, is to punish enough businesses in Europe that pressure will build to change the EU trade policy that bars buying of hormone-treated beef and favors Caribbean banana producers over others. Carl Lindner, head of Chiquita Brands and a major political donor, has pushed hard for the U.S. sanctions.

The Clinton Administration is reconsidering its plans to add cashmere and shortbread to the next tariff list, based on a personal appeal by British Prime Minister Tony Blair. In addition to the wrangling over beef and bananas, Blair and other EU leaders are demanding that the U.S. change tax policies that greatly favor major American exporters.

"It's a tough business as it is, without further complications," says Ferguson of Clan Douglas, which makes cashmere sweaters and accessories, and exports at least 25% of them to the U.S. If cashmere is hit with the 100% tariff, "people in America will stop ordering," she says. "It's a very big issue for us."

PRICEY FRILLS. Even if bath salts come off the list, Reinert says, he won't reopen Reha Enterprises. He's now selling cars to support his family and pay off what he owes his freight forwarder, who paid the tariffs on his behalf for a while. "If it can happen to me, it can happen to anybody," says Reinert, who paid $52,000 in extra duty before calling it quits last spring. "The government can and will expropriate your money if somebody pushes the right buttons."

The tariffs have cost Yves Delorme, a company that imports French linens under the Palais Royal name, more than a quarter-million dollars so far. Because the tariff applies to unembellished linens only, the parent company added decoration to all the linens that Yves Delorme imported since the list went into effect. Trouble is, the normal tariff on unembellished linens is about 6%, but the normal tariff on decorated ones is 25%, so adding the decoration to avoid the punitive 100% sanction still added heavily to the company's costs.

"It has not been a pleasant experience for us," says James Deter, secretary of Yves Delorme in Charlottesville, Va. "It's very irritating to be a small business bearing the brunt of this, when big importers, be it Mercedes or BMW, get off scot-free," Deter says. "We are a small company, so we don't have the money to spend on lobbyists. People like Chiquita banana can buy their way."

So while the governments wrangle over cashmere and other luxuries, small businesses wait to find out how many more companies will be punished in the transatlantic battle over bananas and beef.