Latin American manufacturers produce 30.5 percent of all apparel imported into the U.S.

WASHINGTON — Apparel makers in Central America, Mexico and the Andean countries of South America are counting on duty breaks and their proximity to the U.S. to keep their American market share from drastically eroding next year when quotas...

WASHINGTON — Apparel makers in Central America, Mexico and the Andean countries of South America are counting on duty breaks and their proximity to the U.S. to keep their American market share from drastically eroding next year when quotas limiting apparel and textile exports are lifted for World Trade Organization members.

However, apparel executives admitted that the strength of these competitive advantages will be tested once lower-priced Asian exports are no longer restrained.

Latin American countries benefit from a patchwork of free-trade agreements and trade-preference deals that give them a variety of duty and quota breaks. Together, Mexico and the nations of Central America, the Caribbean Basin and the Andean region are the source for 30.5 percent of all apparel imported into the U.S.

The elimination of quotas essentially threatens this market share, since quota-free treatment will now be nearly universal. The question becomes whether the natural advantage inherent in the region’s close proximity to the U.S., which can dramatically cut shipping time compared with Asia, and the various duty breaks are enough to offset the competitive advantages of Asian countries, particularly China.

While each country can export garments duty-free to the U.S., if the garments are made from U.S. textiles, Mexico and Andean countries also get tariff breaks for using local textiles. In addition, there are other duty breaks specific to textiles and garment inputs such as trim that also vary among these Latin American competitors.

“We have been getting ready for the end of quotas for five years,” said Roberto Rosenberg, trade commissioner of the Guatemala Trade Office in New York.

Rosenberg noted that orders for spring and summer 2005 apparel from his country haven’t tapered off. He said Guatemalan apparel makers are increasingly vertically integrated, including finishing operations like laundries.

“We have also seen some consolidation going on,” Rosenberg said. “There are so many uncertainties about 2005. No one knows what’s going to happen. But the Central American region — if we don’t talk about price — is the best alternative for U.S. buyers to shorten delivery times and respond to fashion cycles.”

However, the competitive luster of Central America, as well as the Dominican Republic nearby in the Caribbean, is expected to fade if the already negotiated Central American Free Trade Agreement with Guatemala, Honduras, Costa Rica, El Salvador, Nicaragua and the Dominican Republic isn’t implemented.

This story first appeared in the September 28, 2004 issue of WWD. Subscribe Today.

The Bush administration negotiated CAFTA late last year, but the White House so far hasn’t asked Congress to consider the pact, since international trade is a sensitive voter issue in this presidential election year.

If President Bush wins the Nov. 2 election, it’s widely expected he’ll bring CAFTA before Congress in a lame-duck session that month. However, if Democratic opponent Sen. John Kerry wins, he said he would renegotiate CAFTA to include tougher labor and environmental standards, a process that could prolong Congressional consideration well into 2005. The CAFTA deal currently calls for benefits to be effective retroactive to Jan. 1, 2004 — although that presumes Congress will approve the deal.

In addition to making two-way trade duty-free, CAFTA would make allowances for some Mexican and Canadian woven fabrics to be used in garments receiving tariff breaks. There are also provisions permitting limited supplies of fabric from other parts of the world. This mix of sources for textiles is seen as keeping CAFTA countries competitive in a quota-free world.

If CAFTA doesn’t materialize, “just let me know when the funeral begins,” said Henry Fransen, executive director of the Honduran Manufacturers Association. “It’s something that’s really needed. We would really be hurt enormously if we don’t get it.”

However, for the time being, Fransen said Honduran garment manufacturers, which produce mostly knitted apparel, are continuing to receive spring and summer orders, “and in most cases their orders are increasing for 2005.”

Fransen said textile mill investments are also increasing. As an example, he cited Russell Corp.’s construction this year of a jersey and fleece fabric mill in the country, which will supply the company’s four sewing operations and 4,000 employees already in Honduras.

The $50 million mill “will play an important role in our efforts to continue to lower costs in this highly competitive portion of our business,” said Jack Ward, the company’s president and chief executive, in a statement announcing construction.

Russell is angling to leverage Latin American trade breaks with operations in El Salvador and Mexico. The same is true with International Textile Group, which owns Burlington Industries and Cone Mills and plans to build a Guatemala City denim plant once CAFTA is in place.

Wilbur Ross, chairman of ITG, said the company’s strategy is to diversify production sources. Cone already has a mill in Mexico and joint ventures in India and Turkey.

“We are far along with more joint ventures in Asia,” Ross said. “One way or another, we feel the textile industry should have a worldwide sourcing map in order to match where our customers want their clothing cut and sewn.”

Mexico’s apparel and textile makers have been undergoing restructuring for several years, as competition from Central America, as well as Asia, has increased. At the same time, the country’s wages and associated employment costs have increased, a key factor in the decline to around 10 percent of the U.S. imported apparel market from its 15.6 percent peak share hit in 2001.

Gary Gereffi, a Duke University sociologist who has been tracking Mexican apparel production since the North American Free Trade Agreement took effect in 1994, pegs the country’s apparel woes to several factors: increased labor costs, smaller factories, complicated government regulatory schemes and competition from Central America and China.

However, Gereffi said Mexico will still likely stay in the apparel game as a U.S. supplier because of its proximity and for certain strong categories, such as jeans and other pants.

Still, Gereffi said, Mexico’s market segment “doesn’t seem to be a growing industry. Mexico really hasn’t expanded on its previously strong position, and I think people are questioning how much Mexico wants to stay in the business.”