Portion Control

Thinking about manufacturing offshore? Consider the cost of quotas first.
Magazine Contributor
8 min read

This story appears in the December 1998 issue of Entrepreneur. Subscribe »

You can't pick up a newspaper today without reading about one company or another making the decision to manufacture its products offshore. Pricing in the marketplace has become a kind of bidding war, and many businesses are finding that to compete, they must shop for foreign manufacturing alternatives. If you decide you want to manufacture your product offshore, however, you may have to factor in the cost of an import quota.

The idea of placing quotas on the amount of goods that can be imported into the United States is not new. In 1792, Alexander sponsored legislation to institute import quotas that served to protect infant American industries and allow them to mature rather than face defeat by imports. Since then, some type of quota has always existed in this country. Today, the vast majority of import quotas are found in the textile and apparel industries, although quotas on other import items, such as tuna, cheese and some types of watches, also exist.

There are several types of import quotas, including the following:

  • Global quotas. A global quota designates the total amount of a specified product that can be imported in one year. For instance, there could be a global quota of 100 million caps that will be allowed into the United States during any given year. That global quota is then broken down, and specific quantities are assigned to individual countries in the form of absolute quotas.
  • Absolute quotas. These are assigned to an import product from a specific country for a particular quantity. For example, the U.S. Customs Service could establish an absolute quota in which only 10 million pairs of cotton pants from are allowed to cross U.S. borders in a given year. Any Indian cotton pants over that number would be refused entry by U.S. Customs.
  • Tariff-rate quotas. Products assigned this type of quota have no quantity cap. However, similar to the U.S. tax system, the more you bring in, the higher a tariff you'll pay on the goods.
  • Seasonal quotas. These are usually assigned to food items and correspond with the growing seasons. For example, when strawberries are in season, a quota on imported strawberries may be assigned to prevent a glut, which would cause price erosion in the U.S. market.

So how are these quotas determined? This is where it gets dicey. In general, quotas seem to be more a reflection of political intervention and lobbying than of market forces. Officially, two government agencies are involved in the establishment of quotas: the office of the U.S. Trade Representative (USTR) and the Committee for the Implementation of Textile Agreements, which is made up of representatives from the departments of State, Commerce, Labor, Treasury and Agriculture. Quotas are generally negotiated for each country at one time to last for several years.

Currently, the United States has negotiated absolute quotas with 47 countries. Once a quota is assigned to a country, the U.S. government doesn't get involved in the process by which the country divvies up its quotas. As a result, there's great opportunity for corruption and favoritism in exporting countries. Some countries hold quota auctions, where quotas go to the highest bidders. Others allocate their quotas to specific factories. And, as you can probably guess, the friends and family of those in power are often awarded large portions of certain countries' quotas.

Like it or not, as an entrepreneur trying to import a product you've manufactured offshore that has an assigned quota, you're now a pawn in this game and must pay to play.

Tomima Edmark is the inventor of the TopsyTail and several other products and is author of The American Dream Fact Pack ($49.95), available by calling (800) 558-6779. Questions regarding inventions and patents may be sent to "Bright Ideas," Entrepreneur, 2392 Morse Ave., Irvine, CA 92614.

How It Works

Let's walk through a practical example of how you'd go about importing an item that has a quota assigned to it. Let's assume you've designed a cardigan sweater, only to find it will be too expensive to make locally. Market research has discovered that similar cardigan sweaters have been imported from and the cost to manufacture them there is significantly lower than what your local company charges. However, India has an assigned quota on these sweaters. So what's your first step?

The first thing you should do is find a buying agent, a representative who lives in the exporting country and has a relationship with various factories in that country. He or she also has the know-how to procure quota visas for your goods. The agent will contact the different factories to find the one best suited to make your sweaters at the most reasonable price and with the level of quality you specify. In return, the agent takes a percentage of the cost of your goods. Finding a good buying agent can be a long, drawn-out process, but a good place to start is the U.S. embassy or consulate for the country in which you intend to manufacture your product.

Before a quota visa can be purchased for your sweaters, you have to decide on the quantity of sweaters and the number of shipments to be made per year. Say you plan to import two shipments of 5,000 cardigan sweaters for a total of 10,000. Armed with this information, the buying agent will now acquire two quota visas issued by the government of India for 5,000 sweaters each. Because a quota visa must accompany each shipment accepted by U.S. Customs, two quota visas must be procured.

Keep in mind that once a quota visa is arranged, it's usually final. If you change your mind at the last minute and want to increase the quantity of each shipment to 5,500 sweaters but have already purchased quota visas for 5,000, you're probably out of luck.

The price for quota visas fluctuates constantly--the higher the demand for one, the more expensive it will be. In general, visa costs tend to go up toward the end of the year when their availability becomes more scarce due to the increase in demand for products during the U.S. holiday season.

To help with the receipt of your sweater shipments into the United States, you'll also need a customs broker. These brokers live in the United States and know how to handle the mountains of paperwork (including the quota visas) that accompany imported shipments. A customs broker is an expert at avoiding those "gotchas" (like missing or incorrect paperwork) that can keep your shipment held up in U.S. Customs indefinitely. Since the customs broker receives all paperwork prior to the receipt of a shipment, he or she can check to make sure your quota visas are legitimate, which will save you time and hassles. You can get a list of licensed customs brokers from your local U.S. Customs office.

The sweater example illustrates the importance of finding reliable and honest buying agents and customs brokers. Jack Wasserman, an lawyer and senior partner with Wasserman, Schneider, Babb & Reed in New York City, offers examples of just a few of the potential problems that could throw a monkey wrench into your shipment, some of which can be avoided by hiring a reputable agent and broker:

  • The factory is late with your production.
  • The raw materials have the incorrect fiber content.
  • The manufacturing quality is poor.
  • The country's entire quota is used up by the time your shipment is ready. (A quota visa can't be purchased until the product has been manufactured.)
  • The visa is deficient; for instance, it's issued for the wrong category of a particular product.
  • The classification of your merchandise is wrong. (For example, U.S. Customs finds your cotton sweater line to be a wool sweater line.)
  • U.S. Customs questions the country of origin.

Wasserman advises checking references before hiring a buying agent and then creating a written agreement to guard against potential problems. Also, don't pay him or her in advance; reliable agents won't request this. And when paying an agent with a letter of credit, make sure it's written carefully so payment isn't made before you have a chance to review the production situation.

Easing Up

There is some good news on the horizon regarding quotas. In January 1995, the World Trade Organization (WTO) agreed to eliminate all textile and apparel quotas among its members by July 1, 2005. This has put pressure on nonmember countries, such as China, to comply with WTO requirements so their quotas will be lifted as well.

NAFTA has also had a positive impact on quotas. Since its signing, products made with North American fabric and assembled in Canada and Mexico are free of quota restrictions. It's important to remember, however, that the elimination of quotas doesn't mean you won't have to pay customs duties. The United States still has the power to levy duties on any imported goods.

If you'd like more information on quotas, you can log on to the following government Web sites: http://www.USTR.gov and http://www.customs.ustreas.gov

Contact Source

Wasserman, Schneider, Babb & Reed, (212) 619-1770, wsb@customs.com


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