More than a year has passed since the Bush administration completed negotiations on the proposed Central American Free Trade Agreement, and the trade package is still awaiting final approval.
Over that time, a critical change has occurred — the quotas that regulated the apparel and textile trade for the past three decades expired on Jan. 1. That event, according to U.S. and Central American executives, has turned the question of when CAFTA will be approved by Congress into a matter of critical concern.
The six nations covered by CAFTA — Honduras, Guatemala, El Salvador, Nicaragua and Costa Rica, along with the Dominican Republic — last year shipped $9.29 billion worth of textiles and apparel to the U.S.. This gave them a combined market share of 11.2 percent, which would rank the trade block second only to China.
That trade has developed gradually over the past few decades, largely as a result of a series of trade-promotion programs, from the 807 and 807a provisions that encouraged the development of the region’s local industry to the Caribbean Basin Trade Promotion Act that took effect in 2000. That deal allowed qualifying apparel made in the region to enter the U.S. free of duties and quotas.
With quotas gone, that benefit loses much of its punch, and industry executives fear that the economic development that has occurred in the region as a result of CBTPA is at risk. Importers are looking closely at moving sourcing out of the region.
In a bid to get CAFTA moving, the Bush administration has started to talk with U.S. textile executives — many of whom had opposed the deal — to alleviate their concerns.
The industry’s attitude to the pact is beginning to change.
“If this sits around a year, it won’t do any good,” said Wilbur Ross, chairman of International Textile Group.
Ross’s $900 million Greensboro, N.C.-based textile conglomerate that he created by merging Burlington Industries and Cone Mills has plans to open a denim plant in Guatemala City that would produce 32 million yards of fabric a year, but only if CAFTA passes.
The CBTPA program allows apparel made in the region to enter the U.S. without paying duties — which average 16 percent — as long as they’re primarily made of U.S. fabric. CAFTA would extend benefits to garments made of fabric produced in any of the seven countries, including the U.S., that are part of the agreement. Central American makers argue that setting up a stronger textile industry in the region would allow them to offer faster turn times and lower prices than they can while forced to use U.S. fabric.
Central American manufacturers report they’ve already started to lose some orders as a result of the expiration of quotas, and many fear they’ll lose more if CAFTA doesn’t take effect soon.
“There has been some deterioration of our business, as some of the items that we have been manufacturing for a number of years people have now decided to take into China, which was not unanticipated by us but at the same time is a direct result of the elimination of quotas,” said John Peden, director of Polar Industrial, a Guatemala sportswear maker with 800 employees.
Steven Kolpas, chief financial officer of JeanWorks LLC, a jeansmaker based in Highland Falls, Ill. with a factory in Guatemala, said late last year he noticed importers starting to pull out of the region.
“You definitely saw whoever was on the very low, tight [margin] end — meaning the Wal-Marts and Targets of the world — starting to pull out at the end of last year,” he said. “The region, although still competitive in some things, is not as competitive in the commodities.”
He said in the time since CAFTA was negotiated, “A lot of the business that could have stayed here has left and probably won’t come back.”
Approval in the U.S. has been held up by political battles between importers who support the measure and elements of the textile industry who have complained that it will cost U.S. mill jobs.
Some importers contend there are higher principles at stake and note that, given Central America’s close proximity to the U.S., it’s important that the U.S. consider the region’s economic well-being.
“This is an area that we have a very strong strategic interest in,” said Peter Boneparth, president and chief executive officer of Jones Apparel Group. “If CAFTA doesn’t pass, it’s a very dark day for free trade.”
Experts said one factor that’s giving Central American makers breathing room is the uncertainty surrounding China. That nation, already the U.S.’s leading supplier of imported textiles and apparel, is also seen as the country that will benefit most from the lifting of quotas. However, China’s exports might be limited by temporary safeguard quotas over the next three years, and the uncertainty surrounding that possibility has many importers holding off from moving large amounts of new business into China early this year.
Officials from the region noted that Central American manufacturers have already begun trying to reposition themselves so as not to compete directly with Chinese rivals. One step has been trying to move into higher-priced goods.
Marcio Cuevas Quezada, the Guatemalan minister of economy, noted that the average price per unit of his country’s apparel exports rose 13 percent over the past year.
“That tells us the opportunity is still there” to compete, he said. He noted that Guatemalan makers “are trying also to add design into their full-package programs to give something more value-added.”
Still, he acknowledged that CAFTA benefits will likely prove critical for the future of the industry. “It will be a tremendous damage for the country if we are not inside CAFTA,” he said.
In addition to helping the region’s existing garment makers remain competitive, CAFTA will extend duty-free treatment to locally produced textiles, which means its passage could help the region attract more investment.
Henry Fransen, executive director of the Honduran Manufacturers Association, said, “We’re seeing interest in Brazilian companies to put up denim and knitting factories. We’re seeing interest in people putting up yarn spinning over here. That is welcome.”
So far, one major U.S. roadblock to CAFTA’s passage has been opposition by the domestic textile sector. But the mills’ position is starting to shift, with more executives deciding to throw their weight behind CAFTA. It could mark a turning point, with U.S. mills and importers beginning to line up on the same side of a trade issue.
An example of this sea change is Jim Chesnutt, president and chief executive officer National Spinning Co., a yarn producer and knitter, with U.S. and El Salvadorian production.
“We are in favor of a CAFTA and very much want to get one passed that is good for the domestic textile industry,” Chesnutt said. “We continue to talk to the government regarding our concerns, and we are open to creative solutions.”
Part of the reason for the change of heart among some textile executives has been the realization that CAFTA could represent a boon to a region that is the primary export market for U.S. textiles. In the last year, U.S. textile sales to CAFTA countries have accounted for almost $4 billion in sales, representing 26 percent of industry exports.
“Nearly everything the U.S. textile industry makes is sent to either Mexico or Central America to be sewn,” said Jerry Rowland, ceo of yarn spinner National Textiles, based in Winston-Salem, N.C.
The change of heart comes in an industry that had been regarded as one of the few remaining stumbling blocks to CAFTA’s passage in the House, the pact’s first and steepest Congressional hurdle. Other potential CAFTA spoilers are the sugar industry, organized labor and faith-based groups — all with their own contingent of lawmakers questioning CAFTA’s merits.
Some textile executives continue to take issue with the three exceptions to CAFTA’s local rule of origin. The exceptions would allow Nicaragua, the region’s poorest country, to use 100 million square meters equivalent of fabric annually from anywhere in the world for its garment production. Another exception was also granted to 200 million SMEs of fabric from neighboring Mexico that could be used by any of the five CAFTA countries.
A third exception that’s been drawing fire is that pocket and lining fabrics have been exempted from the local rule of origin.
“If they would change these exceptions, you would get wholehearted support from the entire [textile] industry,” said Roger Chastain, president and chief operating officer of Greenville, S.C.-based Mount Vernon Mills, which produces pockets and linings.
The administration has been reaching out to the National Council of Textile Organizations and the National Cotton Council in an effort to ease the industry’s concerns over the bill.
Regardless of such differences, Cass Johnson, president of NCTO, said the association’s members remain unified in CAFTA talks with the administration.
“There are members that feel CAFTA is important for them, but they also realize there are problems with CAFTA that hurt other [NCTO] members that need to be addressed,” he said.
Alan Gant, president of apparel and industrial fabric-maker Glen Raven Mills, based in Glen Raven, N.C., who is also NCTO’s chairman, said, “For the first time in a long time, the [textile] industry is unified with the administration and Congress to come to a solution with everyone.”
Congress cannot amend the CAFTA pact, so any steps to address the textile industry’s remaining complaints would need to be negotiated outside of the agreement. Possible solutions include a side deal with Nicaragua to limit its use of non-CAFTA fabric and a toughly worded Customs agreement to guard against illegal transshipments.
Not all corners of the textile industry are as enthusiastic about administration overtures for a CAFTA deal.
One example is Roger Milliken, chairman and ceo of textile giant Milliken & Co., who last week lobbied lawmakers on Capitol Hill against CAFTA. Milliken, 89, is not a member of NCTO, but belongs to two other associations with textile memberships — the American Manufacturing Trade Action Coalition and the National Textile Association — that remain opposed to CAFTA.
“Mr. Milliken is not into deal-making and he thinks it would be a horrible idea for this industry to cut a deal,” said Milliken’s chief lobbyist, Jock Nash.
Securing even a swath of U.S. textile mill support would be a sea change in the volatile arena of apparel and textile trade politics. Retailers and other importers routinely face off in Washington with U.S. textile interests, often in bitter debate over the direction of U.S. trade policy and legislation.