Feb. 5 (Bloomberg) -- The humble cotton sock has become the center of an international trade dispute.

The U.S. decided on Jan. 18 that millions of pairs of duty- free socks imported from Honduras may be hit with a tariff. The ruling made the hosiery a symbol of the choices that politicians, workers and even towns face in a global economy.

Honduran imports jumped to more than 27 million dozen pairs last year from 10 million in 2005, after the Central American Free Trade Agreement passed. U.S. workers have lost jobs as a result, the kind of issue Democratic presidential candidates use to criticize trade agreements. Still, feelings are mixed.

This safeguard is not free,'' said Brenda Jacobs of Sidley Austin LLP, a Washington law firm representing clothing importers who are trying to keep costs down. ``The question is which U.S. industry is going to get socked with increased duties on its exports to Honduras?'' That's because, under the treaty, the U.S. would have to pay compensation for a tariff.

The row began when Bush administration officials were trying to secure votes to pass the trade agreement with five Central American countries and the Dominican Republic. To win the support of Representative Robert Aderholt, a Republican from Alabama with sock mills in his district, officials promised to monitor Honduran imports and impose what is termed a ``textile safeguard measure'' if warranted.

The flood of imports, which pushed Honduras ahead of China and just behind Pakistan, led to last month's announcement by the U.S. Committee for the Implementation of Textile Agreements. The interagency group, which supervises such accords at the Commerce Department, can impose up to a 13.5 percent tariff on an estimated $109 million worth of Honduran cotton sock shipments through the end of the year.

Honduras Responds

The Honduran government responded to the tariff threat in a Jan. 18 statement that said the agreement hasn't been in place long enough to make an argument for domestic safeguards. It also said the domestic industry hadn't formally asked for protection and that a tariff would ``negatively'' affect other U.S. textile producers -- namely yarn mills supplying the increased production in Honduras.

As a condition of the 2005 agreement, Honduran socks come in duty-free as long as they are made of American yarns, a provision that doesn't apply to Asian countries.

Supporters of a tariff, including N.C. Sock Co. in Hickory, North Carolina, and Wigwam Mills Inc. in Sheboygan, Wisconsin, fear they won't be able to withstand a continuing surge of imports from Honduras.

Employees Cut

George Ruppe, president of Ruppe Hosiery Inc. in Kings Mountain, North Carolina, told the committee that he has cut capacity and employees to cope with imports even though the company has some of the latest knitting equipment.

Added Dennis Martin, president of N.C. Sock, ``There are few changes we can make to adapt our operations and stay in business.''

James Schollaert, a lobbyist in Arlington, Virginia, for U.S. sock manufacturers that favor the tariff, placed much of the blame on Gildan Activewear Inc., of Montreal, which is making socks in Honduras and exporting them to the U.S.

Schollaert said Gildan, with a sales office in Barbados, enjoys tax advantages that American manufacturers don't have. The company is ``flush with cash'' to buy domestic mills or expand in Honduras, as it plans to do if the preferences are not disturbed, he said.

Gildan, North America's largest T-shirt maker, has bought and closed U.S. hosiery mills over the last two years. It purchased Kentucky Derby Hosiery Co. Inc. of Mount Airy, North Carolina, in 2006 and closed all but one of its U.S. facilities.

Pipeline to Wal-Mart

Gilden recently acquired V.I. Prewett & Son Inc. in Fort Payne, Alabama, acquiring a direct pipeline to mass retailers like Wal-Mart Stores Inc., the world's largest retailer.

Gildan lobbyist Ron Sorini, of Sorini, Samet & Associates LLC of Washington, said the trade dispute is being portrayed as a battle against his client, especially by big competitors that support safeguards as a way to blunt competition.

Lobbying has won converts. Sorini, who was the textile negotiator in the U.S. Trade Representative's office, said many more domestic sock makers now oppose government action than two years ago.

Some manufacturers have sent parts of their sock production to Honduras while at least one, Kelly Hosiery Inc. in Fort Payne is now Kelly Hosiery de Honduras because it moved its factory.

Top executives who led the fight for quotas against Chinese sock imports a few years ago now are free traders.

Changed Business

Jonathan Shugart, president of W.Y. Shugart & Sons Inc. in Fort Payne, said his small mill changed its business model. The company now knits children's socks in the U.S., sends them to Honduras for labor-intensive finishing and packaging, and brings them back duty-free.

It's still a plus to the U.S. manufacturing sector,'' he said in an interview.

William H. Jordan, the mayor of Fort Payne, the self- proclaimed Sock Capital of the World, shows the complexity of the issue. He first supported the tariff idea. After Gildan explained that it would harder to operate the Prewett Hosiery in his town with the import tax, he backed off.

In a Dec. 19 letter to the committee, he said, my position on the safeguard has been somewhat clouded'' by the split in the local industry. I want what is best for the people of Fort Payne because many families' livelihoods are touched by this situation.''

He urged the committee to review and investigate the issues as thoroughly as possible. Much depends on it.''