Central America makers eye export surge under Trump
DR-CAFTA apparel exports are seen surging 10% to roughly $9bn this year
Central America could benefit from a NAFTA re-write under US president-elect Donald Trump, according to local executives, who are optimistic of a surge in apparel exports as many China orders swing back to the region.
"We had a few tequilas because we were very afraid of the TPP," muses Alejandro Ceballos, president of Guatemalan apparel industry trade association Vestex, when asked how his country and Central America viewed US president-elect Donald Trump's shocking sweep into the White House.
"Everyone has a hard time understanding Trump, but he has a side Obama never had; he is a businessman and not a politician. He knows how global commerce and trade works."
Unlike Mexico, where Trump is seen as a "horror movie" with threats to cancel or modify the North American Free Trade Agreement (NAFTA), in Guatemala Trump is viewed as a saviour of an industry that last year feared a huge blow from the passage of the Trans-Pacific Partnership (TPP).
But now that the real-estate mogul has vowed to pull out of the pact and made no threats to undo DR-CAFTA – the Dominican Republic-Central American Free Trade Agreement linking Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica and Dominican Republic with the US, the world's biggest apparel consumer – the industry expects a bonanza.
Specifically, Ceballos predicts DR-CAFTA apparel exports will surge 10% to roughly $9bn this year – reversing a 2.2% decline to $8.15bn at the end of October – after TPP uncertainty idled many maquilas in basics major Honduras as well as in El Salvador.
Trump wants to punish countries helping fuel a US trade deficit, such as China and Mexico, where he claims many American jobs have been lost to automobile and other advanced manufacturing sectors, according to Ceballos.
Central America seen flourishing
Consequently Central America, which imported $23.1bn of US goods in 2015 versus exporting $9.2bn (across a range of sectors), and makes fewer industrial products than Mexico, will likely be allowed to flourish, he adds.
"Central America imports the majority of yarn from the US, much more than Mexico, and we don't have an industrial base or products to export," Ceballos explains. "CAFTA is good for the US, which already sends two times [more than] what we send back."
That noted, the US does have a textiles and apparel deficit with the six countries bordering Mexico. In the year to October 2016, it sent $1.5bn worth of yarn and $893,000 of fabric to the impoverished region, up 6.5% and 8% respectively. In turn, Central America shipped $8.1bn of apparel to the likes of Wal-Mart, JC Penney, Amazon and VF Corp.
Ceballos says an "emergency flow" of orders barrelled in after Trump won, mainly because several importers that were boosting sourcing to Vietnam and Asia to profit from TPP made a U-turn and quickly returned orders to Central America.
"They wanted to clean their face and look good" after Trump chose textiles billionaire Wilbur Ross as Commerce Secretary to push his anti-China agenda. That will likely impact Vietnam's strategy to source cheap raw materials from the world's second economy, widely seen as helping it grow its industry to the number two US clothing supplier.
Ceballos now expects many China orders to swing back to Central America and, coupled with a strengthening US economy, to bolster demand for the basic garments and increasingly fashionable knitwear, pants and blouses Central America makes.
Because of the region's proximity "we have been replenishing orders, but now I think we will also get the longer [bulk] ones" China has specialised in, Ceballos says.
Jesus Canahuati, owner of fast-growing Honduras vertical knit textiles supplier Elcatex, agrees Trump will benefit the bloc.
"We bring jobs to the US," says the executive, who is leading the 'Honduras 2020' development plan to build a massive synthetics manufacturing hub. "Trump doesn't like NAFTA because it helps Mexico steal jobs from the US."
Honduran exports could gain 5% to 7% in 2017 after declining 3% this year, he adds.
"All the US store closures affected us, including Sports Authority, Wal-Mart, Gap and Macy's," Canahuati muses. However, due to climbing US orders and a slew of new factory openings in Honduras set for next year, shipments should surge strongly, he says.
Fruit of the Loom, Gildan and Delta have also stepped up investments to bolster production in Honduras.
Can Central America meet the challenge?
With few rickety roads and a tiny port infrastructure, observers concede the expected surge in orders will cause headaches.
"We don't have enough infrastructure," says Ceballos. "Our roads are very slow and we have few and little ports and airports."
The dearth of port and ship infrastructure means containers heading to Miami from Guatemala cost as much as $4,000 versus $1,000 when travelling to Long Beach, California from China.
Trump's plan to expel 3m criminal immigrants from the US (some of which could be Central American) could depress remittances income, which in Guatemala's case totals $8bn – five times the $1.5bn it makes from apparel exports.
"If remittances fall, exports will have to rise," adds Ceballos, noting that the region must privatise infrastructure to enlarge and modernise it.
Trump could help here, Ceballos hopes, adding that the US's huge apparel needs will encourage the president-elect to mobilise financing to expand Central America's manufacturing capacity.
Central America is also seen benefiting from the new US president's threat to slap a 35% tariff on Mexican textile and apparel exports.
"Mexico has never played clean," Ceballos charges, adding that it has unfairly kept Central America in the shadows.
"They sell but don't want to buy anything, and when you want to export there they have a million non-trade barriers that make it impossible for Central American firms to enter their market," Ceballos claims.
Alternative to Mexico
Patricia Figueroa, president at El Salvador's textiles and apparel association Camtex, is similarly upbeat.
"There has been fear Trump would eliminate CAFTA, but Ross has given assurances that won't happen," she enthuses. "Buyers will start seeing us as a more interesting alternative to Mexico" on top of Asia. "We may have an interesting turn."
However, Central America's customs are notoriously inefficient and slow, with heavy red tape offsetting any geographical proximity gains, Figueroa claims.
"A big challenge is to improve customs to move goods, samples and short-runs more quickly and change officials' mentality," she says, agreeing that this inefficiency could cause bottlenecks as new orders stream in.
Governments must also provide investors further assurances that their money will be safe.
"There needs to be real certainty about the rules of the game and that these won't be subjected to the [whims of the] politician of the day," Figueroa concludes.
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