Making intimate apparel in Honduras, which has implemented CAFTA.

The fashion industry has been waiting nine months for the duty-free benefits promised in CAFTA to fully kick in, but snags and unexpected costs have led many firms to reassess their sourcing commitments in the region.

WASHINGTON — One of the biggest unknowns in sourcing this year is whether Congress will make legislative changes to the Central American Free Trade Agreement to help retailers, apparel importers and textile producers that are being adversely affected by slow implementation of the trade accord.

The fashion industry has been waiting nine months for the duty-free benefits promised in CAFTA to fully kick in, but snags and unexpected costs have led many firms to reassess their sourcing commitments in the region.

So far, only the U.S. and three of the other six CAFTA countries have implemented the accord, which has complicated co-production in the region and generated unforeseen costs for apparel companies. At the same time, unfinished side deals negotiated with lawmakers to get CAFTA through the House last year have had an impact on some U.S. textile producers.

Apparel and textile imports from the CAFTA region declined 15.71 percent in the first quarter versus a year ago, according to Commerce Department figures. The six CAFTA partner nations — Honduras, Nicaragua, El Salvador, Guatemala, Costa Rica and the Dominican Republic — combined to export $9.1 billion worth of apparel and textiles to the U.S. in 2005, accounting for 17 percent of the U.S. apparel import market, second only to China.

Honduras and Nicaragua implemented the trade deal in early April, joining El Salvador, which put it into effect in March, and the U.S., which ratified it in August, but their entry has created its own set of problems for producers.

Even if Guatemala enters in June, as many expect, the problems will persist because the Dominican Republic is still working to resolve issues and Costa Rica hasn’t ratified the agreement. Last week, Oscar Arias returned to the presidency in Costa Rica, aiming to use his centrist policies and skills as a mediator to unite a country that has become sharply divided over CAFTA. About 4,000 union members, students and academics protested at his inauguration, urging that the pact not be ratified, claiming it puts Costa Rican farmers at a competitive disadvantage.

Apparel now made in El Salvador, Honduras and Nicaragua, using materials from other countries yet to ratify CAFTA — Guatemala, the Dominican Republic and Costa Rica — are subject to duties that exceed 30 percent in some cases.

This story first appeared in the May 16, 2006 issue of WWD. Subscribe Today.

The way the trade treaty was written, the CAFTA signatory countries that have not fully implemented the accord do not receive the duty-free benefits and must adhere to the stricter rules under an existing preferential trade program known as the Caribbean Basin Trade Partnership Act.

The Bush administration has presented two proposals to Congress to fix the glitches, but there has been movement on Capitol Hill to draft the needed legislation.

Some industry and legislative sources maintain nothing will happen until Rep. Bill Thomas (R., Calif.), chairman of the House Ways and Means Committee, who is retiring at the end of the year, decides to push a legislative package through the House.

“I would be quite surprised if the industry were stiffed on this,” said Gary Hufbauer, senior fellow at the Institute for International Economics. “Business groups lobbied aggressively to help push CAFTA through, and friends in Congress will remember that, but they will want the industry to do additional work to get these laggard countries” to resolve outstanding issues.

Hufbauer said there would no movement until all the countries have implemented CAFTA.

“Thomas will hold up any refund bill [for importers and retailers] until [the final three countries] sign, as leverage to get them to implement,” Hufbauer said. “I think Thomas, [Sen. Charles] Grassley (R., Iowa) and [Max] Baucus (D., Mont.) will be sympathetic and I do not think it will be a rerun of the initial CAFTA vote” in the House, which narrowly passed by two votes last July.

The Bush administration made commitments to House textile-state lawmakers to make changes to CAFTA to secure enough votes for passage, including one to preserve pocketing and lining business in the U.S., and another to protect U.S. cotton and man-made trouser business in Nicaragua.

Hufbauer said the lawmakers will be able to find a revenue-related bill to which to attach an amendment containing the duty refunds and other CAFTA changes. He expects lawmakers to bundle all of the CAFTA changes together and move it is as a single package.

Many industry experts feel it will be difficult to move legislation this year, mainly because of the November midterm elections, when the entire House and a third of the Senate is up for grabs.

“The biggest fear for importing companies is whether [a legislative fix] can happen this year,” said Julia Hughes, vice president of international trade at the U.S. Association of Importers of Textiles & Apparel. “We know there is good will on the Hill and good will in the administration to get things done, but it is hard to imagine Congress will act without it being a full package.”

In the interim, apparel importers are shouldering the extra costs with no guarantee they will be reimbursed and some are shifting business back to the U.S. or Asia.

“When Nicaragua and Honduras came on board, it relieved some of the pressure, but it created pressure in other areas,” said Stephen Lamar, vice president of the American Apparel & Footwear Association. “Companies are being as conservative as possible in planning their businesses. They may scale back or move somewhere else entirely, which is what we have already seen.”

Mark Jaeger, senior vice president and general counsel at Jockey International, said the rolling implementation has had some impact on the company. Jockey operates plants in Honduras and Costa Rica, producing underwear and T-shirts. It also uses contractors in the region. Jaeger said one of Jockey’s biggest concerns is thread that is finished in Costa Rica and used in apparel production in Honduras, and therefore does not qualify for duty-free treatment.

“We are paying duties on some of our styles,” said Jaeger. “That is a duty which would not otherwise have been paid if we continued to operate under [CBTPA], which is ironic.”

He said Jockey has shifted some sourcing of thread for specific styles back to the U.S. because “it made more sense economically.”

Levi Strauss & Co. sent a letter to Scott Quesenberry, special textile negotiator for the U.S. Trade Representative’s office, outlining concerns over the way CAFTA is being implemented.

“CAFTA was intended to strengthen the U.S./Dominican Republic/Central American textile and apparel manufacturing partnership and keep our industry competitive in the region,” Helga Ying, director of worldwide government affairs and public policy for Levi’s, wrote in the letter. “However, this transition period has become highly disruptive, creating a significant amount of uncertainty and administrative bureaucracy for apparel companies such as [Levi’s].”

Ying urged Congress to work to ensure that the CBTPA stays in effect until CAFTA is in force for the last signatory country.

Meanwhile, textile producers are anxious to see Congress pass legislation changing pocketing and lining rules and foreign-fabric allowances for Nicaragua.

“It’s been nine months since CAFTA passed and it’s having a negative impact,” said Cass Johnson, president of the National Council of Textile Organizations.

He said companies sourcing in the CAFTA region are switching from U.S. pocketing to Asian pocketing, which is resulting in a loss of orders for domestic textile producers.

The U.S. has completed negotiations on pocketing and lining with El Salvador, Honduras and Nicaragua, according to letters between Quesenberry and his counterparts in those countries. It appears the U.S. made several concessions in exchange for the pocketing and lining change.

In the case of El Salvador, the U.S. agreed to allow an unlimited amount of foreign yarns and fabrics in the assembly of infants’ dresses, women’s and girls’ cotton coats and women’s and girls’ man-made fiber suits under “single transformation rules,” which means all the CAFTA countries will receive that benefit.

Nicaragua received a change to its foreign-fabric allowance of 100 million square meters equivalent for a full 10 years and a carve-out within that limit for men’s wool sport coats, in addition to man-made fiber and cotton trousers.

Honduras received a foreign yarn and fabric allowance under single transformation rules for men’s man-made fiber shirts and all of the CAFTA countries will receive that benefit.