A major rug manufacturer in Sanford says it is poised to either expand or collapse depending on the outcome of its pending request for free trade status to import yarn without paying tariffs.

Flemish Master Weavers, which employs about 130 people in Maine, is trying to tap into a little-used federal program that would allow it to avoid duty payments of 8 percent to 9 percent on the polyester and polypropylene fibers it imports from Turkey to make its Oriental-style rugs.

The company said it is caught between U.S. competitors that pay no tariffs because they produce their own yarn, and increasingly large overseas competitors that can undercut prices with lower labor costs. However, it faces an uphill battle in its quest for trade zone status because of objections from within the U.S. textile industry.

If it succeeds, the company plans a major expansion of its 210,000-square-foot manufacturing facility, President Johan Moulin said. If its free trade status is denied by the U.S. Department of Commerce’s Foreign Trade Zones Board, competitive pressures likely will force it to phase out domestic manufacturing altogether. All of the factory jobs in Sanford would be lost.

“Over time, we’ll become an importing company instead of a manufacturer,” Moulin said of the 28-year-old business. “That’s what I’m afraid of.”

Flemish Master Weavers is a major player in the home products industry and is one of Sanford’s largest employers. Its 11 enormous looms produce about 2.5 million square meters of rug each year, which can be purchased at retailers including Macy’s, Home Depot, Wal-Mart and Bob’s Discount Furniture. It is one of only four large rug manufacturers remaining in the United States.

The problem, Moulin said, is that the company is the only U.S. rug manufacturer that lacks its own yarn-making operation. Its competitors are older companies that own such equipment, which he said would cost the company upwards of $5 million to purchase. That’s more than it can afford, meaning the only affordable way to procure yarn is to buy it overseas.

But while imported yarn is taxed at 8 percent for polypropylene and 8.8 percent for polyester, fully manufactured rugs made of those materials can be imported with no tariffs. Moulin said he thinks the bizarre inconsistency is a result of some decades-old regulatory oversight, but that there is no political will to rectify it.

“Nobody’s going to look at the tariff of one item in the code because of one manufacturer in Maine,” he said.

COMPETITION GLOBALLY AND AT HOME

There is a potential way around the problem, but it is being threatened by opposition from the U.S. textile industry.

Maine has five established foreign trade zones: in Waterville, Auburn, Bangor, Madawaska and Brunswick. Such zones are specially designated areas that operate almost like duty-free shops for manufacturers that import and export products. Import duties on raw materials used in production are waived, and some export fees also can be waived.

Compliance costs associated with capitalizing on their benefits have curtailed the use of Maine’s trade zones, but Moulin said the company is willing to front those costs, which include turning the manufacturing site into a Department of Homeland Security-approved import site with fencing and other security measures.

Obtaining trade zone status would save the company roughly $1 million a year on its materials costs, he said.

“It’s not that we are asking for an advantage or a benefit,” Moulin said. “We are just looking to level the playing field.”

So Flemish Master Weavers requested an extension of Waterville’s foreign trade zone to include the Sanford operation as a “subzone,” and in July, it received preliminary approval. However, there was a problem.

Three trade groups – the American Fiber Manufacturers Association, National Council of Textile Organizations and United States Industrial Fabrics Institute – jointly filed an objection to the company’s trade zone application. That objection letter could be enough to derail the company’s application, said Wayne Coleman, a consultant Moulin hired to help Flemish obtain the trade zone status.

“With one objection from commerce, it can put the kibosh on the whole process,” said Coleman, president and chief operating officer of Memphis, Tennessee-based FTZ Networks Inc.

In their objection, the trade groups argued that there are U.S. suppliers of plastic yarn from which Flemish Master Weavers could be buying its materials, and that those domestic suppliers could be harmed in the future by any action to avoid tariffs on foreign yarn.

“Approval of this petition … would harm existing producers of the yarns in interest and also set a damaging precedent threatening broad nullification of the established import duty structure for polyester and polypropylene yarn used in U.S. production of area rugs,” it said.

Moulin said the problem with that argument is that there are only a handful of domestic producers of poly yarn: boutique manufacturers that lack the production capacity to meet Flemish’s needs, and Flemish’s rug-making competitors.

“First of all, they probably wouldn’t want to sell it to us to begin with,” Moulin said. If they did, he estimated the cost would be about 33 percent more than the imported Turkish yarn, even with the tariff included.

Given that the company has no realistic options to domestically source its yarn and is at a disadvantage against both foreign and domestic competitors, Moulin was surprised that the industry groups turned against him.

“Why are they not defending us? They should be supporting us,” he said. “We are creating jobs in the textile industry.”

Writing on behalf of the three organizations opposing the trade zone application, National Council of Textile Organizations spokesman Lloyd Wood said via email that the groups would not answer specific questions because the application is still pending. He did add that the organizations believe Flemish Master Weavers’ application is inappropriate because it is for a fast-tracked summary approval intended for uncontested cases.

“The American Fiber Manufacturers Association, National Council of Textile Organization and the U.S. Industrial Fabrics Institute jointly opposed the summary application in favor of examining the full range of facts required by the Foreign Trade Zones Board under its regular application procedure,” Wood said. “The company has the opportunity to refile on those standard terms.”

Moulin and Coleman hope to get help from Maine’s congressional delegation. Coleman said he has a meeting scheduled for Sept. 19 with Sen. Angus King, and that he has asked Sen. Susan Collins to attend, as well.

“They’re keenly aware of the stakes here,” Coleman said.

Flemish Master Weavers is part of Natco Home Fashions Inc., a Rhode Island company, and has operated its rug-making business in Sanford since 1991. Natco is one of the largest companies in the home textiles industry, with manufacturing facilities in Georgia, Maine and Toronto, as well as several joint ventures in China. Central Oriental is the fashion brand for the company.

In 2002, Natco purchased a majority interest in Flemish Master Weavers, which had previously operated under the name Rainbow Rugs.

The company has been planning a 78,000-square-foot expansion, Moulin said, but those plans are on hold and only will be carried out if the company obtains trade zone status. Otherwise, it’s likely that Natco will slowly scale back the manufacturing side of Flemish Master Weavers and shift to a model that relies solely on imported rugs. That would mean major job losses in Sanford.

“We are a prime, prime, prime example of why legislation created the foreign trade zone,” he said.