By and  on March 29, 2011

In the five years since the Central American Free Trade Agreement was implemented, U.S. and European apparel brands and retailers have faced sourcing challenges but are now said to be looking to increase business in the region.

While the recession hit Central America hard and led to a decrease in U.S. apparel import volume in 2009 and created an uncertain business climate for the seven CAFTA countries, trade has begun to bounce back in the past year and companies are now exploring new investment opportunities. Central America’s apparel and textile industry could attract significant apparel investment by 2015 as U.S. and European brands shift activities to offset deepening sourcing woes in Asia, industry experts said.

Retailers and brands such as Wal-Mart Stores Inc., J.C. Penney Co. Inc., Aéropostale Inc. and Hugo Boss are said to be ready to move some of their apparel sourcing to Central America, according to sources.

Apparel import trade to the U.S. from the other signatory countries — Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica and the Dominican Republic — rose 19 percent to 3 billion square meter equivalents in 2010 compared with a year earlier, according to the Commerce Department’s Office of Textiles and Apparel. Not only has the region become a vibrant sourcing platform, it also serves as a major export market for U.S.-made fabrics and yarns. Textile exports rose 21 percent in 2010 to $2.49 billion, according to the National Council of Textile Organizations.

While Asia, and particularly China, has wooed large orders from U.S. and European brands for years, some of those contracts are now expected to go to Central America as China’s domestic clothing demand soars and labor costs rise.

“U.S. retailers and brands are very nervous about surging domestic demand in China,” said Walter Wilhelm, chief executive officer of trade consultancy Walter Wilhelm Associates. “They worry that Chinese producers will begin to focus on meeting internal needs and less on exports so they won’t be able to get as much stuff out and on time.”

China’s unions are also clamoring for higher wages while prices of key raw materials such as cotton have risen sharply, boosting production costs.

“Shipping rates are now higher than in this [Western] hemisphere and there are more labor woes, so major U.S. companies are looking to hedge themselves by moving sourcing elsewhere,” Wilhelm said.

A similar phenomenon is at work in India and Pakistan, where governments are forcing manufacturers to meet local demand, further squeezing export-linked production. While industry officials acknowledge that CAFTA has not lived up to its full potential, there is a growing consensus that the region is likely to attract new investment and continue to expand.

“It’s done some of what it was supposed to do,” said Nate Herman, vice president of international trade at the American Apparel & Footwear Association. “It has definitely maintained business in the region and created some new investment, but it just hasn’t been anywhere near what people were hoping because of the staggered implementation of the agreement and the recession.”

But conditions in Central America are beginning to improve. “The region is starting to get better and it’s starting to get a lot more fabric capacity,” said Herman.

Julia Hughes, president of the U.S. Association of Importers of Textiles & Apparel, said her members are “starting to take a fresh look at sourcing in the CAFTA region.”

“If you look at the trade numbers, most of them are up and I do think that reflects a positive and that companies are coming back,” Hughes said.

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