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Hudson Clothing Finds Loophole to EU Tariff on Jeans

High-end denim makers in the U.S. might have found a way to sidestep a controversial EU tariff on denim.

In April, the European Union announced a more than 200% increase in the duty on women’s denim imports from the U.S., from 12% to 38%. The move had a particularly deleterious effect on the premium denim segment, and sent shock waves through Southern California, where around 75% of American high-end denim, from brands like Hudson Jeans, Paige, True Religion and others, originates.

For six months American apparel makers and supportive industry lobbyists have been hard at work trying to overturn what they consider to be an unfair duty. The aggressive hikes are seen as retaliation for the US failing to comply with the WTO’s ruling against the Byrd Amendment, which allowed the US unchecked discretion to impose duties on goods it deems “unfairly traded,” or dumped, on the U.S. market. Even though Congress repealed the Byrd Amendment in 2006, its effects continue. Some U.S. companies continue to collect monies deemed to be due them based on its provisions.

Last week, the UK Customs and Tax Department rendered a decision that might be a turning point in the situation, however.

California-based Hudson Clothing LLC claimed in a legal argument to the UK Customs authority that the 38% tariff should not apply to its products because they do not fit the definition of denim set out by the Harmonized Tariff Schedule under which EU tariffs are administered. According to the Harmonized Tariff Schedule, denim is: “fabric of yarns of different colors, of three-thread or four-thread twill, including broken twill, warp faced, the warp yarns of which are of one and the same color and the weft yarns of which are unbleached, bleached, dyed gray or colored a lighter shade of the color of the warp yarns.” Since Hudson jeans are processed differently, the argument contended, they should be classified under the tariff provision as cotton pants. The UK Customs and Tax Department eventually agreed.

Elise Shibles, an attorney at Sandler, Travis and Rosenberg (ST&R) who represented Hudson, said, “We were able to convince Her Majesty’s Revenue and Customs that the jeans should fall under the tariff classification for cotton women’s trousers other than denim or corduroy and, as such, should be exempt from the increased tariff. Hudson jeans are definitely made of denim as the term is used in the apparel industry but they don’t fall within the legal definition of denim within the Harmonized Tariff Schedule. They are properly classified in the EU under Tariff Code 6204.62.3990, which means they are not the type of garments subject to the tax hike.”

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According to Tom Travis, managing partner at ST&R, the ruling could be a bellwether for a future rescission of the EU duty. He said, “The UK ruling is a step in the right direction in fighting the retaliatory tariffs imposed by the EU last spring. We are now working with Hudson and other west coast blue jean companies to seek refunds for overpayment of taxes and obtain rulings on other items that should have been exempt from the tax all along.”

Shibles feels that the ruling will be cross-honored by the other 27 European Union countries, who recognize each other’s binding rulings.

Industry lobbyists are also seizing upon the ruling as a catalyst for change. Steve Lamar, executive vice president of the American Apparel and Footwear Association, said, “We’ve been using the process to pretty loudly and forcefully talk to the U.S. and European negotiators about the problems that occur as a result of this punitive tariff that got put on us.”

At least thus far, the tariff has not had a significant effect on denim sales for U.S. exporters. Many U.S. brands and European retailers have had to absorb some or all of the cost increases without having to raise prices to the consumer. Samuel Ku, creative director for AG Jeans, said, “The tariff has not really affected our European business from a gross sales standpoint. The tariff has, however, affected [our] profitability and [that of] our European partners.”

However, the long term effects could be substantial. Ku added, “If the tariff continues, we may have to strategically place production of certain product outside the U.S. That would be worst-case scenario.”

Ilse Metchek, president of the California Fashion Association, also pitched a gloomy appraisal of the damage that could be wrought by the tariff in the future. “The timing [of the tariff] couldn’t be worse for the ‘Made in the USA’ push,” she said. “On the heels of this tariff, it is quite easy to turn on a dime and make it elsewhere. This just chases work offshore.’’