Why CAFTA is critical for Guatemala
To survive in a quota-free market Guatemalan apparel executives believe they need to offer full package services, keep costs in check and continue to take advantage of proximity to the US market and speed of response. Many are also banking on a US-CAFTA trade agreement to ensure their future competitiveness and the region's growth prospects.
As US retailers ramp up the global search for the lowest prices, many apparel manufacturers in Guatemala believe their only chance of expanding business ties with the vast American market is the successful passage of the proposed Central American Free Trade Agreement or CAFTA.
The trade deal, which President Bush signed on Friday but will still need to be formally approved or ratified by Congress, would extend the North American free trade area to Guatemala, Honduras, Costa Rica, Nicaragua, El Salvador and the Dominican Republic.
Supporters - including US retailers and importers and, of course, Guatemalan clothing makers - believe such an agreement will bring more business to the region, create more jobs and provide the US market with a viable and flexible sourcing alternative to China.
In particular, the "rules of origin" clause would enable apparel manufacturers to use yarn and fabric inputs from any CAFTA country and still receive benefits (at present companies must use inputs from the United States); while a provision called cumulation would enable them to use woven materials from NAFTA (North American Free Trade Agreement) partners Mexico and Canada.
"CAFTA is a landmark agreement," said Robert Boynton from the US State Department's office of Central American Affairs speaking at the Apparel Sourcing Show in Guatemala City earlier this month.
He told industry executives: "Proximity to the US gives you a substantial advantage over Asian manufacturers. The question is whether this proximity offsets the cost factors of doing business with Central American countries. Right now, without CAFTA, the answer is 'no'; with CAFTA the answer is 'yes'."
Without CAFTA there is widespread fear that Guatemala and other Central American countries will simply be priced out of the supply chain in favour of cheaper labour elsewhere in the world.
China's textile and clothing exports to the US, for example, are ballooning. In the year ending March 2004 they grew by 54 per cent to $11.99 billion according to the US Commerce Department, giving China a 20 per cent share of the US market. Furthermore, export growth is likely to rocket next year in response to the expiration of international quotas.
However, protectionist sentiments and anxiety about US textile supply - and consequently jobs - moving offshore are running high in the US. And as these are particularly sensitive political issues it seems unlikely that Congress will pass to any new trade agreement in an election year.
But as Julia Hughes, vice president of trade and government relations at the USA ITA (United States Association of Importers of Textiles and Apparel) points out: "2004 was always going to present problems for apparel manufacturers and the passage of CAFTA is the priority this year.
"The timing is critical. Companies are already placing orders for 2005 and CAFTA needs to be passed as soon as possible to ensure business stays in this region."
At present, apparel exports from Guatemala (and all Caribbean Basin Economic Recovery Act or CBERA countries) to the US enter duty-free under the Caribbean Basin Trade Partnership Act (CBTPA), at reduced rates under Harmonized Tariff Schedule 9802 (807 programmes), or at normal duty rates.
For the year ended February 2004, 17 per cent entered under the 807 production-sharing program which provides special access for apparel assembled from fabric wholly formed and cut in the US.
A further 32 per cent of Guatemala's apparel exports to the US came under CBTPA provisions, which in broad terms means they enter the US duty- and quota-free if they are cut and assembled from regional or US fabrics made from US yarn. The use of regionally knit fabrics is subject to a cap and there are no preferential benefits for the use of regionally woven fabrics.
As Guatemala relies on the US for 95 per cent of its apparel exports, trade benefits and few restrictive quotas have played a key role in building the industry and, to a certain extent, offsetting its rising production costs. Today the country's 226 clothing factories and 39 textile mills employ 141,638 people and the sector's value added in 2003 was $422 million.
CBTPA provisions have also helped encourage Guatemalan manufacturers to move into full-package production where they can take advantage of local suppliers of fabric, zippers, buttons and elastic and add value to their products by dyeing, cutting and sewing.
Despite these advantages, however, the high cost of US yarns and fabrics - which manufacturers must use to qualify for the trade concessions - makes it harder and harder for companies to remain competitive against apparel made with Asian inputs.
In fact, many Guatemalan apparel producers say even though lead times are longer it is as financially viable to source fabrics from the Far East, assemble them in Guatemala and pay duties into the US as it is to use US fabrics and ship the goods to the US under the CBTPA.
Joshua Ramazzini, merchandising manager at full package intimate apparel manufacturer Grupo Indurasa, says that in the case of lingerie "it's cheaper to bring in lace from Hong Kong, straps from Spain, hooks and eyes from France and do the production and packing here and ship to the US."
Where CAFTA would help is by extending duty-free benefits to fabrics and yarns sourced in both CAFTA and NAFTA countries - and in some cases Asia too.
Other complex areas would also be simplified. For example, dyeing and finishing processes could be carried out in any CAFTA country. And under the Single-Transformation Rule boxer shorts, pyjamas and girls' dresses would to receive duty-free treatment simply by being cut and sewn in a CAFTA country - even though all the components could come from outside the area. Brassieres, under CAFTA, would follow a simple "cut-and-sew" rule in member countries.
Fabric supply is key to success
Industry executives say fabric supply and the development of a sizeable textile industry will be a key to the future of Guatemala's apparel sector. But they also believe that although US buyers are gearing up to boost production in Central America, their plans are on hold until the fate of CAFTA agreement is settled.
Guillermo Zimeri Massis of textile group Textiles del Sur says: "CAFTA is very important for the textile industry in this region but we need to look at investment into increasing production. Demand is high but Guatemala is not competitive against China. If we want to sell into the US they will compare our prices with China. Costs in Guatemala are 20-30 per cent higher than in China."
As well as boasting the region's only seamless garment plant, Textiles del Sur has nearly 1000 employees making 1.5 million metres a month of twills, athletic fabrics, warp and circular knits, and hosiery. The company is building its seamless capacity up to 20 Santoni machines, but says uncertainties over CAFTA mean further investment in this area is suspended until a decision is announced.
At Guatemala's (and arguably Central America's) biggest textile company Liztex, more than 2,500 workers produce 3 million metres of twills, denim, corduroy, piece dyes, interlocks and jerseys in a range of cotton, polyester, rayon, linen and Lycra blends are woven and knitted each month. 90 per cent of the raw materials come from the US, and 60 per cent of production is exported to customers including JCPenney, Levi's and Wal-Mart in Mexico and the US.
"We need CAFTA to compete under the same conditions on a level playing field," says export manager Saul Mishaan. "Buyers are coming here as an alternative to China. Guatemala adds a lot of value to goods so we are ready for CAFTA."
A significant proportion of Guatemala's textile and apparel sector is foreign - particularly Korean - owned. Investors were initially attracted by the country's proximity to the US, where shipping times are 2-6 days; its low labour costs; and its quota-free status.
Seamless plant at Textile del Sur's Nylotex division
Many of them, like vertical knitted cotton garment maker Shin Won, say investors are now looking for new incentives to stay in the region. "US yarn quality is lower and the price is approximately 30 per cent higher than the Far East so we are not getting any benefit for the buyer," says the company, which chooses to import 70 per cent of its fabric consumption from the Far East.
For other South Korean manufacturers the future without CAFTA is stark. One, which asked to remain anonymous, said: "Development has only taken place in this region because of the duty benefits. The strength of Central America is that it is close enough to the US to meet short lead time orders. But price-wise we cannot compete with low labour cost countries like China, Vietnam and Indonesia.
"If the US doesn't intend to sign an agreement with Central America next year then we will have to consider other locations."
Marco Antonio Rosales, president of MBS International, which makes tops and bottoms mainly for Lerner New York, cautions: "If the agreement is not signed this year and moves into 2005 it would mean 'good-bye' to the industry in Central America." He adds: "I would like quotas kept until 2007/08, until CAFTA is in place and US investment comes into Guatemala. This extra 3 years would help out."
Regional sourcing decisions
How will the new agreement affect sourcing decisions in the region? Data from the US Commerce Department shows that in the year ending March 2004 apparel and textile exports from CAFTA nations to the US were worth $7.106 billion giving them a 9.13 per cent share of American imports.
Kirkor Balci, vice president of corporate sourcing and group manufacturing for Liz Claiborne Inc, says: "Our judgement is that fashion products should be made in the western hemisphere." He adds that the company will favour vertical countries for speed to market and "if we cannot bring textiles into Central America we will lose orders."
Indurasa's Ramazzini is keen to see CAFTA passed as it would "open up free trade throughout the Americas" and encourage new investors into the region. However, he is also keeping his options open for the future.
"If CAFTA is not passed then we will have to look at alternatives," he says, including a full relocation to its Colombian facilities from where it can take advantage of ATPDEA (the Andean Trade Protection and Drug Eradication Act). Indurasa has already invested $2.4 million here on a new catalogue and website to sell high quality lingerie and sleepwear throughout South America.
But he is optimistic that whatever happens, US buyers won't put all their eggs in one basket: "They will leave at least 15-20 per cent of their production in this region - which is what we have today."
Julia Hughes of the USA ITA also believes that post-2005 US importers plan to reduce the overall number of suppliers they source from; but to increase business with strategic partners. With this in mind, Guatemala stands out in two key categories: it is the fourth largest supplier of cotton knit shirts to the US, with a 7.48 per cent share of the market; and is the sixth largest supplier of cotton trousers and shorts, with a 3.76 per cent market share.
By Leonie Barrie.
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