Last May, Guatemala's textiles and apparel industry celebrated the implementation of the Central American Free Trade Agreement (CAFTA-DR) as a move that would enable one of the country's largest trades to emerge from its doldrums and bring progress to its impoverished economy. But nearly 12 months on the clock, CAFTA-DR is failing to live to its much ballyhooed promises, as Ivan Castano reports.

The CAFTA-DR implementation phase has been slow and complicated, prompting the industry to lower its growth forecasts to 10% by 2009 from 25%.

From June 2006 to June 2007, the industry is expected to deliver a 3% turnover increase to $1.65bn, down from a previous 5% growth forecast for 2006.

CAFTA-DR's big promise for the arrival of $600m in investments and significant job creation in the trade block - which includes other members Nicaragua, Honduras, El Salvador, Costa Rica and the Dominican Republic - are now looking overly optimistic.

Only $70m of foreign capital has so far reached Guatemala, dimming hopes that it will receive the $300m it wants to lure by 2009.

The sector also expects to lose 5,000 workers this year as factories restructure to adapt to CAFTA-DR.

Implementation woes
Despite this, Carla Caballero, general manager of largest trade lobby Guatemalan Apparel and Textile Industry Commission (Vestex), is optimistic that CAFTA-DR will deliver.

She says CAFTA-DR's uneven implementation - in which some countries rushed to join the pact while others fidgeted for months before doing so - fuelled uncertainty and delayed investment projects in Guatemala.

The Dominican Republic, for example, waited to launch CAFTA until March from prior plans to do it last June. And Costa Rica, the poster child of criticism, has yet to apply the legislation by year end.

Implementation woes apart, Guatemala's textiles and apparel sector must work harder to squeeze CAFTA-DR's full benefits.

"There is still a lot to be done," Caballeros says. "We need to work to attract more investment, increase and improve our manufacturing chain."

Still, she says CAFTA-DR should help boost the industry's share of national value-added gains to $15m in the first year from $10m. The value metric shows the financial gains of using the CAFTA-DR region - as opposed to imported raw materials - in the manufacturing chain.

Caballero's comments come as Guatemala is gearing up to host the 15th Annual Apparel Sourcing Show (APPS) in Guatemala City. The event will take place from 17-19 April and will assess CAFTA-DR's impact on the region's textiles and apparel industry.

Preliminary reports show that 70% of the block's apparel entered the US duty free in 2006.

Guatemala's textiles and apparel industry is working to woo more foreign investment, particularly from Korean and Mexican manufacturers, Caballero says, adding that it's currently negotiating investment projects with a few Korean giants. Korean-owned
producers already churn out 60% of the industry's output.

"We want them [the Koreans] to install fabric plants here to feed their apparel factories" to further integrate and bring efficiencies to the production chain, Caballero adds.

Korean investment
Already, Hilaturas Shangon and Korean P&K Dye House have earmarked $30m and $3m to build an 11m tonne/year yarn factory and a fabric-dying and finishing plant respectively. A big unnamed Mexican firm has also committed $30m-$40m to build a 100 linear metre denim plant outside Guatemala City, Caballero points out.

The actions have boosted CAFTA-DR-related investments to $120m, $50m of which come from national manufacturers eager to modify their businesses to profit from CAFTA-DR.

Asian manufacturers continue to pound Guatemala, Caballero says, as some producers continue to buy cheap Chinese fabrics - instead of CAFTA-DR feedstocks - to power their production.

This, and CAFTA-DR's problematic start, trigged 3,000 job losses last year - leaving the workforce at 121,000 - as implementation delays prompted foreign producers to shift contracts to cheaper outposts in Vietnam or Cambodia, bringing huge losses for companies that had sewed up packages for sale to CAFTA-DR customers.

The Guatemalan apparel and textiles industry is also making progress to increase its output of value-added niche products and speed of delivery to become a more competitive CAFTA-DR supplier, say industry observers.

Guatemala already makes synthetic fibres, denims, woven fabrics and twills and is boosting production of technical products such as insect repelling, soil relief or dry-fit fabrics.

Leading denim producer Koramsa, for example, has invested millions to transform itself from a producer of plain jeans into one making a more fashionable and elaborate product.

Full benefits in 2010
If all these actions continue apace, Caballero expects the industry to reap CAFTA-DR's full benefits in 2010.

"We are going to see the big results in two to three years, once the factories install new machinery, production rises and people are more aware about how to work with CAFTA-DR," she notes.

Observers say revenues could then start to rise 4%-5% annually.

While Caballero expects the sector to suffer more downsizing, the shift from basic to value-added products should help boost producers' bottom line, lifting wages in an industry where pay surpasses Guatemala's minimum wage.

Emerson Chuquiej, exports director at Guatemala City apparel maker GYV, agrees that CAFTA-DR will benefit the sector. However, he says the government must cut the taxes on imports of machinery and many synthetic fabrics that cannot be bought in the CAFTA-DR block.

The state charges a 12%-15% import duty plus a 12% additional tax for the import of textile manufacturing machines and many technical fabrics, Chuquiej says, adding that the rules are hindering foreign investment and undermining producers' efforts to modernise their businesses and specialise in niche products.

Another stumbling block is the US's failure to negotiate CAFTA-DR's cumulative provisions to allow members to use textile inputs from Mexico and Canada (two nations with which the US has free trade deals) to make apparel for duty-free sale to the US, something that its expected to do later this year.

Key apparel such as socks and pocket fabrics also continue to trade outside CAFTA-DR, Chuquiej adds.

Apart from these, the administration should also work to foster local investment, says the owner of a small cotton and apparel manufacturer in Antigua, the touristy town outside Guatemala City.

"The government keeps saying they are going to provide credits and other subsidies but the help never comes," he says, adding that borrowing rates are very high in Guatemala.

Child labour?
Guatemala has been recently criticised for its "inhumane" child labour policies that allow business to employ children under 14.

However, Caballero says the textile and apparel industry does not employ children.

"We don't have this problem in our industry," Caballero says. "This is an export industry that's constantly audited by the international brands which don't allow this type of employment."

Despite this, a UNICEF official says that 12% of working children labour in the manufacturing industry of which the textile and apparel sector is the biggest representative.

"There must be some and I'm sure they are not working in the best conditions," says the UNICEF official, requesting anonymity.

According to UNICEF, about 1.5m of Guatemala's 5.5m children work. More than 800,000 of those children are aged 7-12.