With 3,300 exhibitors occupying 930,000 square feet under one roof this year, it seemed like business as usual at the MAGIC fashion trade show held in Las Vegas this past August. But underscoring the sales activity, there was quite a bit of buzz about the most significant issue the U.S. textile and apparel industry has had to contend with in some time.

January 1, 2005 is being touted in some circles as this industry’s D-Day. Come the beginning of next year, all quotas restricting textile and apparel trade between World Trade Organization member countries are slated to be eliminated.

So what’s the big deal, you ask? According to the WTO’s August report, China and India – already known for their high-volume, low-cost clothing manufacturing industries – stand to almost triple their combined share of the U.S. clothing market. The report predicts that China’s take will leapfrog from 16% to 50%, while India will experience a bump from 11% to 15%. (Not surprisingly, there were four different seminars held at the show, each doling out advice to manufacturers on how to operate in the post-quota world.)

Opponents, namely U.S. textile and apparel manufacturers based in the cotton-rich Southern States, say lifting the quotas will effectively destroy the U.S. industry as we know it. China will flood the market with cheap clothes, driving down prices and putting companies out of business and a lot of people out of work. Accordingly, the industry has mounted a formal campaign to have the U.S. government petition the WTO to extend the quotas until at least 2008, but industry speculation suggests the motion is unlikely to succeed.

Apparel licensees and licensors in the kids business are taking a wait-and-see position. Doug Lo, VP of sales for ShoPro’s Sonic X licensee Top Heavy, says it’s not clear how the post-quota landscape will shape up, and there are rumblings that some yet-to-be-determined categories will keep their quotas. ‘There’s a lot of cooks in the kitchen,’ he says wearily, ‘but no master chef right now.’

Lo says that Chinese product flooding the market is a real possibility, particularly in the sportswear industry. But it’s a different story for the licensed tee business. ‘In the T-shirt world, speed is life,’ he says. Top Heavy produces most of its goods with Mexican manufacturers who assemble the clothes using U.S. components. And Lo says Mexico’s geographical closeness to the U.S. market is key because it means quicker turnaround times and shipping.

If you’re looking at sourcing in China, you have to count on a minimum of 14 days to ship the goods. That’s just not quick enough to accommodate rapidly changing styles and fashion, says Lo, and he doesn’t think that the Mexican industry will fare as badly as WTO predicts. (Its report says Mexico’s market share will fall from 10% to 3%). That said, plummeting price-points remain a concern.

Lou Shalam, president of New York’s Freeze, which holds licenses to big-name properties such as SpongeBob SquarePants, Looney Tunes and Bratz, is also wary of what the termination of quotas will do to the apparel retail market. Lower prices, he says, means companies will have to move considerably more volume to make up sales margins. In addition to that, it’s going to take a while to sort out the apparel manufacturing landscape in China. While overseas sourcing is common now, a lot more factories are bound to start springing up there, and North American companies are going to have to figure out which new outfits are producing quality goods. It’s going to be a steep learning curve.

Both Lo and Shalam don’t expect the impending changes will have much impact on licensing agreements. ‘Licensors will continue to get their 10% to 12% royalty,’ says Lo. And licensors, for the most part, agree.

Warner Bros. Consumer Products VP of apparel & accessories Maribeth Towers-Toth says the quotas will affect licensees in terms of sourcing options, but she’s not changing the way she structures deals. Joy Tashjian, president of Joy Tashjian Marketing Group, is also in business-as-usual mode, but does issue a note of caution to licensors unfamiliar with F.O.B. (freight on board) royalty agreements in apparel.

As China increases output and licensees begin to source more apparel there, Tashjian says big retailers will have more clothes shipped directly from the Chinese factories, cutting out North American distributor fees and making for a lower wholesale price – much like they do with toys now. Toy F.O.B. royalty rates are traditionally higher than domestic rates to compensate for lower wholesale prices. Tashjian says licensors need to start making sure that they account for that F.O.B. possibility in their royalty structure on apparel deals, or they’ll see their royalty incomes shrink.