MEXICO CITY — Mexico’s textile industry is confident a ballooning contraband trade can fall sharply in three years as the government strengthens customs inspections and increases raids against so-called “phantom firms” that smuggle billions of fake and subvalued Asian garments into the country.
“We are optimistic,” said David Garcia, president of top textiles lobby Camara Nacional de la Industria Textil (Canaintex). “We think that within a year the government is going to get much tougher on this issue and we will see a drastic fall in this very worrisome activity.”
On the back of fresh strategies to combat the activity, the trade could fall to accounting for three out of 10 garments sold in Mexico, down from six out of 10 now, Garcia predicted.
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One of those strategies shifted into higher gear earlier this month when Mexico unveiled plans to join the international Anti-Counterfeiting Trade Agreement, which 37 countries are hoping to enforce this year.
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Gilda Gonzalez, deputy director general at the Mexican Institute of Intellectual Property (PGR), told WWD that Mexico hopes to join the agreement in the first quarter of 2011, pending negotiations and the Mexican Senate’s approval.
“There are couple of points we don’t agree with so, depending on negotiations and other legal revisions, we could sign the agreement in 90 days. However, our Senate will need to approve it afterward,” Gonzalez said.
If Mexico joins the accord, fake clothing imports should fall drastically, Gonzalez predicted, as customs will be empowered to seize “suspect” containers at port or after they have entered the country. Under current legislation, brand owners must go to customs to report an illicit container or file a claim for the authorities to chase an illegal importer once the goods have reached Mexico.
Under ACTA, the 37-member custom authorities will share information and intelligence to detect counterfeit goods moving between their borders.
Mexico’s domestic textile and apparel sales (as measured by production value) totaled $5.8 billion last year but about 60 percent of the goods were contraband merchandise, arriving mostly from China but increasingly from Bangladesh, Vietnam and Malaysia, according to Canaintex. Of that 60 percent, 67 percent is apparel while the rest are textile products such as fabrics and yarns. The bulk of the goods come in illegally but can also — in the case of counterfeit brands — be made in Mexico.
The phenomenon has worsened since 2006 when it accounted for five out of 10 items sold, stealing billions from Mexican and U.S. apparel firms that make clothes in the country, Latin America’s largest U.S. trade partner.
Contraband goods arrive en-masse at seaports or via the U.S. through what’s referred to as “bronco” contraband. Millions of containers barrel through illegally. They can carry fake or subvalued garments (or a mix of both) destined to the country’s vast network of “pulgas,” or illegal flea markets.
Global “aspirational sportswear” and premium U.S. brands such as Nike, Puma, Adidas, Abercrombie & Fitch, Hollister, American Eagle and Gap are the most popular fakes bought at knock-down prices, consultants said. Adding spice to an already heady cocktail, smuggled old-season U.S. brands are also on sale in these markets. Flea operators sell “markdown” apparel that is two or three seasons out of date and that U.S. retailers want to get rid of and can sell the lowest-quality variants for as little as 50 cents apiece.
“People can buy an old-season Abercrombie T-shirt for 25 pesos instead of 80 at the mall,” said Miguel Angel Andreu, director of the National Textile Institute, an industry think tank, adding that local apparel manufacturers must increase investment to create more exciting and fashionable items that can compete with the U.S. brands as a key strategy to fight the contraband game.
The subvalued merchandise comes in at low prices that allow smugglers to pay less duties — if at all. These include mainly low-end denim jeans, khaki pants, T-shirts and sweaters catering to the country’s large number of low-income consumers. The merchandise is typically brought in by the illegal phantom firms that exist for the sole purpose of importing the clothes.
“When they reach customs, a lot of these cargoes are declared at prices well below their transport or production costs, so they don’t pay the correct tax,” said Garcia, adding that the trade, also called technical contraband, is the industry’s biggest headache. “The Mexican industry can’t compete against these products, made by Asian manufacturers that pay much lower wages and operate under sweatshop conditions.”
When asked why the activity has worsened in recent years, Garcia said Mexico’s huge informal economy provides an ideal sale point for Asian smugglers.
“It’s like a perfect storm,” he said. “You have an illegal market that’s willing to buy and an Asian counterpart that’s willing to sell.”
Mexican customs have long lacked the tools to efficiently combat the trade but Garcia said that’s about to change. The government of President Felipe Calderon has pledged to reduce the activity by toughening up customs and catching the organized crime rings behind the phantom firms.
So far, these firms have avoided tracing by using fake documents and addresses. However, Garcia said the administration “is serious and is working dynamically to tackle the problem.”
In addition, Mexican and U.S. customs authorities recently established a joint force to fight smugglers at each side of the border, mainly focusing on drugs but also on other products. This stronger relationship should help break the so-called “magic bridge” through which huge volumes of Asian garments hit Mexico via the U.S. without paying tax. U.S. and Mexican customs authorities did not return phone calls seeking comment.
“They reach the U.S. as Mexico-bound clothes so they don’t pay duties. Then, when they reach our border, they are declared as ‘U.S. goods’ so they don’t pay duties here either, ” Garcia said, adding that both governments are working harder to identify and seize this merchandise. “It’s a complex and difficult task as we are dealing with millions of containers at a given time but it can be defeated.”
Canaintex and top apparel association Camara Nacional de la Industria del Vestido (CNIV) are also joining forces with the U.S. National Council of Textile Organizations (NCTO) to find new solutions to stamp out contraband, Garcia added.
According to Garcia, the industry and the state are working to provide customs with better training and computer software tools to seize subvalued cargos. As part of this initiative, they are installing electronic databases that allow them to flag up certain products’ raw material costs and average price of country origin “so they can assess their real value” Garcia explained.
Added Canaintex’s general manager Nora Ambriz: “Customs’ IT systems are not sophisticated enough to recognize if a product is undervalued. With these databases officers will be able to see that if a cargo costs $1 but its raw materials costs $2, there is a problem.”
Ambriz expects these systems to gradually become more sophisticated and says pilot versions are already in use to detect subpar textile and yarn products.
Like other law enforcement networks, Mexican custom officials can fall prey to big “mordidas,” or bribes that allow smugglers to carry out their activities, observers said. This problem has been particularly acute at the Manzanillo port — where most Far East goods come in — where officials have been known to engage in corruption. The site has in the past been called the “free port” as loaded trucks have been able to bribe their way out without showing documents and where clothing containers have reportedly been released labeled as “rubber” or other forms of cheaper merchandise.
However, one expert said the database initiative (as one of other strategies being explored to build a more “systematic” customs apparatus) should reduce officers’ discretionary ability to decide how much tax a cargo should pay. In addition, new physical barriers are being installed across ports to prevent cargoes from wheeling by without “running through the central system.”
This, he said, will reduce smugglers’ ability to intimidate bribe-resisting officers. “Now officers can say, ‘This bar cannot come down until the system processes your cargo,’” the observer said, adding: “Custom ports are becoming greater centers of security as they work to fight corruption.”
Customs staff are also being rotated between different ports to keep them from building relationships with smugglers, the observer said.
“The government has realized that the way to win this battle is at the point of entry. There are 54 customs [points] in this country. If you can’t control them, forget it. Once the merchandise comes into Mexico, it’s gone,” said Garcia.
Roberto Casteneda, who heads the CNIV’s antipiracy and contraband unit, agreed that improved customs and enhanced U.S.-Mexican cooperation should help fight the contraband game. However, he doesn’t expect any meaningful reduction unless the state does more to eliminate smuggler networks.
“We don’t have one key smuggler in jail. Why is that?” he asked. “This is the missing part. The government must understand that organized crime is not just drug lords, it’s also counterfeit and piracy gangs, and all of these damage Mexico’s image and economy.”
He added: “They need to do more to fight these gangs. They can’t expect the private sector to do all the work.”
Casteneda was less optimistic than Garcia, saying that contraband volumes are unlikely to fall beyond 30 percent in three years unless the state creates a more efficient “intelligence apparatus” to stamp out organized crime.
Ambriz insisted the 50 percent reduction is possible. “There is a lot of political willingness to end this and the government is capable of acting effectively,” she said. “We are not starting from zero. We have a better equipped and trained customs network that is already conducting more efficient operatives.”