2002 was not a good year for textile and clothing manufacturers in Latin America. Although there are signs of recovery in some countries, companies in Argentina, Colombia and Mexico need to be looking at alternative strategies if they are to survive the elimination of trade quotas at the end of 2004.

In Argentina, textile and clothing production and trade were shaken by the country's dramatic political and economic crisis. The crisis also had a big impact on the textile and clothing industries in other member countries of Mercosur, namely Brazil, Paraguay and Uruguay.

In Mexico, textile and clothing exports fell for the second consecutive year as demand from the US market remained in the doldrums. In Colombia, textile and clothing exports fell to their lowest level in three years as the country continued to struggle against years of internal civil strife.

The impact of the crisis in Argentina has been devastating. Since January 2002 the country has witnessed collapses in its gross domestic product (GDP), industrial production and foreign trade, along with soaring unemployment and poverty. During the first three quarters of 2002 textile production was down by 37.7 per cent compared with the equivalent period of 2001 while clothing production plummeted by 44.3 per cent.

While the brunt of the Argentinean crisis has been borne by companies in Argentina, its impact has also spread to other countries in Latin America - chiefly through a dramatic deterioration in intra-Mercosur trade.

Faced with a slump in demand in the Mercosur region, textile and clothing manufacturers in Argentina and Brazil have at least found some relief in the US market. In 2002 US textile and clothing imports from Brazil rose by 162 per cent to 319.4 million sme (square metres equivalent). Imports from Argentina surged - albeit from a small base - by 362 per cent to 42.4 million sme.

Quota-free competition hits Mexico
In Mexico, the troubles faced by the textile and clothing industry are different in nature from those in Argentina. But in many respects they are as alarming.

Essentially, Mexico is facing tougher competition at the lower end of the US clothing market from Andean and CBI (Caribbean Basin Initiative) countries. Like Mexico, these countries now enjoy unlimited quota-free and duty-free access to the USA in the case of clothing manufactured using US components. Andean and CBI countries are therefore expected to pose a continuing challenge to Mexican suppliers in lower value products such as T-shirts, underwear and brassieres.

Mexico also faces tougher competition in the US market from Asian countries - especially China. Mexico suffered particularly badly from China's entry to the World Trade Organisation in late 2001, which resulted in the removal of a number of Chinese export items from quota at the beginning of 2002.

Things have not improved this year either. During January-February 2003, US textile and clothing imports from Mexico were down by 9.6 per cent compared with the same period of 2002. And yet US imports from the Andean region, CBI countries and China were up by 33.7 per cent, 11.1 per cent and a staggering 132 per cent respectively.

To make matters worse, Argentina, Mexico and Colombia will face the full onslaught of competition from China and other Asian countries after quotas are finally eliminated at the end of 2004. Colombian textile and clothing manufacturers are hoping that the industry can be revived by recent legislation which provides preferential access to the US market.

Competitive advantage
One strategy for improving the survival prospects of the textile and clothing industries in Latin America would be for individual countries to specialise in areas where they have a particular competitive advantage. Countries whose labour costs are low would concentrate on labour intensive sewing operations, while those countries whose capital costs are low in relation to labour costs would focus on capital intensive manufacturing operations such as yarn and fabric production.

This would involve a greater degree of production sharing of the kind which is already well established between the USA on the one hand, and Mexico and Caribbean Basin countries on the other.

 

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Specialisation and production sharing would be strengthened if a free trade agreement between the USA and the Central American countries of Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua were negotiated. Negotiations for such an agreement were launched in January 2003, and an agreement is anticipated before the end of the year.

Free Trade Area of the Americas
The ultimate goal, however, is the much-vaunted Free Trade Area of the Americas (FTAA). Negotiations for an FTAA are scheduled to be completed by January 1, 2005, and a target of December 2005 has been fixed for implementing the agreement. An FTAA would provide the right environment for production-sharing arrangements to thrive.

This timetable is, however, ambitious, given the many road blocks that lie ahead.

So it looks as though any benefits arising from completion of the FTAA are likely to be several years away. Consequently, Mexico and CBI countries will have to devise new short- to medium-term strategies if they are to stand any chance of increasing their shares of the US market.

Probably the best strategy would be for the industries in Mexico and CBI countries to start diversifying into more complex, higher value garments. But such action would have to be taken quickly. Asian suppliers are adopting similar strategies in order to preserve their market shares after quotas have been eliminated at the end of 2004. And whether the industries in Mexico and CBI countries have the ability to diversify quickly enough must remain in some doubt.

Over the short term, therefore, Mexico and CBI countries will continue to ship relatively simple, lower value clothing by capitalising on their main competitive advantages: geographical proximity, low labour costs, and duty-free and quota-free access to the US market. Both could face serious obstacles, however, if Andean suppliers manage to increase their share of the US market for low end clothing.

For Brazil and Argentina, the main hope in advance of an FTAA is a pick-up in regional trade in textiles and clothing as the Argentinean economy begins to emerge from the doldrums.

Brazil will continue to be competitive in the US market for certain fabrics, yarns and made-up textiles. Also, Brazilian exporters are poised to generate greater sales in the European market following the signing of a recent textile market access agreement with the EU.

Unfortunately, the same can not be said of the textile and clothing industry in Argentina. It could take years before the sector fully recovers from the impact of the crisis.

"World Textile and Apparel Trade and Production Trends" is one of six reports in the March-April 2003 issue of Textile Outlook International.