GUATEMALA CITY — When Central American apparel executives discuss U.S. politics, they focus on whether the Central American Free Trade Agreement will pass, not the presidential election nor the war in Iraq.
Many executives and U.S. importers say the future of the region’s apparel sector depends on CAFTA, which is the result of more than two years of talks among the U.S. and five nations — Guatemala, Honduras, El Salvador, Nicaragua and Costa Rica. The Dominican Republic also is seeking to be included in the pact, which offers benefits similar to the North American Free Trade Agreement, including duty- and quota-free treatment for garments and textiles.
President Bush has indicated that he intends to sign CAFTA and may seek approval from Congress as early as this month. Industry lobbyists say the accord is unlikely to pass before the November elections because of the trade deficit and the decline of U.S. manufacturing jobs. CAFTA would be retroactive to Jan. 1, which means that, should it pass, manufacturers would be able to collect duty rebates on qualifying garments they’ve shipped this year.
Through the year ended in March, the five CAFTA countries shipped $7.11 billion worth of apparel and textiles to the U.S., according to U.S. Commerce Department data. That gave them a 9.1 percent share of the U.S. market — placing the combined trade bloc slightly behind Mexico in share — and representing a 0.7 percent decline in sales. That falloff came during a period in which overall U.S. imports in these categories were up 3.9 percent and shipments from China surged 22.8 percent.
Executives from the CAFTA countries said passage of the agreement is essential if their companies are to grow after Jan. 1, when the 147 nations of the World Trade Organization drop their quotas on textiles and apparel. Major importers and government officials from the U.S. went a step further, suggesting that CAFTA is critical to the survival of the region’s industry.
“We’re very happy that CAFTA is coming,” said Sergio Simán, manager of private brands for St. Jack’s Export Corp., a vertical manufacturer of knit apparel based in San Salvador, El Salvador, which employs 2,500 people. “CAFTA will be an important factor in bringing down barriers and improving our speed to market. The CBTPA [Caribbean Basin Trade Promotion Act] program is not as flexible as CAFTA.”
That Caribbean trade act, also covering Central America, took effect in 2000. It gives duty- and quota-free benefits to apparel made in the region, but largely requires that fabrics be made in the U.S. CAFTA would allow Central American producers to use their own fabric.
Manufacturers said that can enhance the natural speed advantage inherent in the region’s proximity to the U.S. because they would not have to rely on textiles being shipped from the U.S. A cargo ship leaving Guatemala’s Caribbean port typically makes the trip to Miami in two to three days. By comparison, a cargo ship from Hong Kong takes at least 11 days to make the crossing to Los Angeles.
Robert Boynton, the U.S. State Department’s desk officer for Guatemala who worked on a report assessing the effect of the end of quotas on the foreign countries, said during a panel discussion at this month’s Apparel Sourcing Show in Guatemala City that CAFTA’s passage would be key to the survival of the region’s industry.
“Absent CAFTA, your proximity won’t close the gap between your costs and Asian costs,” he told Latin American apparel executives.
Marc Compagnon, chief merchandising officer with the Colby International division of $5.5 billion Hong Kong sourcing powerhouse Li & Fung, said the region’s opportunities would be limited without CAFTA.
“I’m not going to say all business will go away without CAFTA,” he said in an interview. “You will continue to have some need for quick turn…but without that, it is going to get difficult for the companies here to find an advantage.”
Bill Wilson, vice president of apparel marketing and sales at Fuente de Ropa de las Americas, a sweater manufacturer in La Paz, El Salvador, said without CAFTA, “all that will be left to us will be the quickest turns and the shortest runs.”
Among U.S. lobbyists on both sides of the CAFTA issue, there is a consensus that it is unlikely that Congress would approve the agreement before the November elections. Asked if he could envision the passage of CAFTA this year, Jock Nash, Washington council for textile giant Milliken & Co., which opposes the measure because of concern that it would sacrifice U.S. jobs, said, “Dangerous things happen in lame duck sessions.”
Julia Hughes, vice president of the U.S. Association of Importers of Textiles & Apparel and a CAFTA proponent, said she believed the bill would pass this year, though, “whether it’s going to happen this summer, or whether it’s going to take a lame duck session after the election, that’s a little bit harder to predict.”
While executives engaged in the Central American trade say they believe the measure will be approved by Congress, their words are backed up by a stream of new investment flowing into the region.
Wilson’s factory, which opened in January, is owned by Washington, N.C.-based acrylic yarn maker National Spinning Co. and is an example of that new investment.
Another investor moving into the region is Wilbur Ross, chairman of International Textile Group — a $900 million textile conglomerate encompassing the former Burlington Industries and Cone Mills. Ross said last week that Cone plans to open a mill in Guatemala City that will produce 30 million yards of denim a year and will serve as the company’s manufacturing hub in the region.
“We’ve concluded that, given the probability of CAFTA eventually going through in some form, we need more of a Central American strategy,” Ross said.
Miamisburg, Ohio-based label producer Shore to Shore also has said it plans a 35,000-square-foot distribution center and manufacturing plant in Guatemala City that will serve as its hub for the region.
“Past 2005, we believe that Central America is going to continue to have a strong position in serving the U.S. market,” said David Slauter, vice president of global sales and marketing.
All the investment flowing into the region isn’t limited to U.S. textile companies looking for lower-cost production.
“We have had a lot of interest from Asian investors who are looking to open mills,” said Henry Fransen, executive director of the Honduran Manufacturers Association, based in San Pedro Sula.
Selim Global Textile Group, based in Siheung, South Korea, in April opened a factory complex producing yarn and knit fabrics outside Guatemala City. It employs about 2,000 and serves local knit garment and T-shirt manufacturers.
Joshua Ramazzini, merchandising manager with Grupo Indurasa, a Guatemala City-based maker of intimate apparel, said the passage of CAFTA “will put us in a better place.”
But, he added, “It’s not that we will disappear if we don’t have CAFTA because we are paying duty now to get into the U.S. market.”
Ramazzini said only about 5 percent of the fabrics he uses would qualify for CAFTA benefits. The majority come from Brazil, Colombia and Mexico, none of which are covered by the deal.
Indurasa’s offerings include bras and robes — two categories of apparel that in 2002 were freed of quota restrictions under the WTO’s 10-year phase-out period. Last year, the Bush administration imposed temporary safeguard quotas on those categories, which are allowed under the terms of China’s WTO accession agreement. Ramazzini said his company already has lived through periods of unrestricted competition with China and has survived because his customers need a local supplier.
Kirkir Balei, vice president of corporate sourcing and group manufacturing at New York-based Liz Claiborne Inc., said about 40 percent of his company’s business is quick-turn merchandise and 20 percent of Claiborne’s apparel comes from Central America.
“Post 2005, we think this number should still be around 15 to 20 percent,” he said.
Indurasa’s Ramazzini said his company isn’t pegging its future only on CAFTA and quick turns. The company also is looking to license a South America brand of intimate apparel that it will sell to the U.S., targeting Latina consumers.
“Getting CAFTA is plan A,” Ramazzini said. “Getting our own brand is plan B. We don’t have a plan C.”
Marcio Cuevas, Guatemala’s minster of economy, said his nation’s apparel industry employs about 140,000 people. This is in a country where only 4 million of 12 million residents have formal work.
“CAFTA is a tool for Guatemala to fight poverty,” he said.
Honduras, Guatemala, El Salvador and Nicaragua, four of the five Central American nations covered by the Central American Free Trade Agreement, have reported modest growth in their textile and apparel exports to the U.S. during the past year. Costa Rica, the region’s wealthiest nation, which briefly pulled out of the talks, has seen its exports drop sharply. The Dominican Republic, which is lobbying to be included in the deal, has also experienced a decline. Overall, the region’s growth has lagged worldwide import growth and trailed China’s skyrocketing performance. U.S. imports of Chinese goods were up 22.8 percent for the period.
Imports for Year Ended March
Change From Previous Year
|Honduras||$2.53 billion||+0.7 percent||3.3 percent|
|Dominican Republic *||$2.09 billion||-4.7 percent||2.7 percent|
|Guatemala||$1.78 billion||+3.4 percent||2.3 percent|
|El Salvador||$1.75 billion||+1.3 percent||2.3 percent|
|Costa Rica||$554.2 million||-24.2 percent||0.7 percent|
|Nicaragua||$489.1 million||+6.5 percent||0.6 percent|
|CAFTA Region||$7.11 billion||-0.7 percent||9.1 percent|
|World||$77.84 billion||+3.9 percent||100 percent|
*THE DOMINICAN REPUBLIC IS STILL SEEKING INCLUSION IN THE CAFTA AGREEMENT. SOURCE: U.S. COMMERCE DEPARTMENT