The apparel sector employs 50% of Nicaraguas industrial workforce

The apparel sector employs 50% of Nicaragua's industrial workforce

Nicaragua's apparel industry is expected to grow 8% to $1.5bn this year, fuelled by rising exports to the US. But while the numbers are encouraging, there are fears they may not last long. 

According to Dean Garcia, executive director at leading industry lobby Anitec, the National Association of Textiles and Apparel, investment in Nicaragua's apparel industry will total $30m this year - matching a similar level made last year as some US brands continue to boost their sourcing in the Central American nation and region.

But like elsewhere in Central America, Nicaragua is fretting that the Trans-Pacific Partnership (TPP) will bring huge losses to its apparel sector, which accounts for 10% of GDP.

This is because Vietnam, already the US's biggest garment supplier and a formidable competitor, could enter the 12-nation free-trade bloc without a yarn forward rule of origin (ROO). If this happens as part of negotiations to strike a landmark agreement, Chinese yarn and fabric suppliers could flood Vietnam and the US though triangulation manoeuvres.  

"If they enter with a non-yarn forward rule, this would mean Vietnam will enter with much easier conditions than the ones we have in DR-CAFTA," Garcia said of the current free trade agreement linking five Central American countries and the Dominican Republic with the US. In common with other DR-CAFTA members, Anitec is asking Vietnam join the TPP under the same DR-CAFTA trading rules.

Ironically, however, Nicaragua's own export performance has been bolstered by more flexible rules of origin under the DR-CAFTA. The country benefits from a tariff preference level (TPL) programme that matches apparel exports made from fabrics and yarns from any country on a one-for-one basis with those that use certain US fabrics and yarns.

Foreign investment
Even if the US, which is leading the TPP talks, orchestrates a favourable deal, Nicaragua must rush to bolster foreign investment to raise key feedstocks output and move into higher-price export niches.

"We are the least integrated country in the region," Garcia said. "We have to invest to increase our yarn, fabric and thread production as those are scarce here."

Added Garcia: "We also have to diversify our production matrix. In the past seven years, we have moved into more value-added underwear, jackets, blazers, women's wear and active sportswear segments. We need to continue this trend."

That of course, will require more international financing - something that Nicaragua and the rest of the region may have a tough time procuring amid the looming spectre that the TPP will trigger a big sourcing shift to Vietnam and Asia.

For now, however, Pride Denim Mills and an unnamed American firm are set to invest $8m to start producing woven and denim fabric respectively this year, Garcia said without detailing other projects. 

He noted firms such as Korea's Hansae and Sae Tecnotec, Guildan, Grupo Beta and Kaltex-Argus, lead the industry.

According to Garcia, the sector employs 75,000 workers or 50% of Nicaragua's industrial workforce - and in 2013 the industry, which draws 95% of revenues from exports, expanded 10%.

"This year will be a bit slower due to price reductions [to gain additional US export share] and the TPP's effect," Garcia said, adding that in 2015 and beyond growth could slow further. "We are facing a very complex trading scenario." 

Export losses
As reported on just-style last month, in 2013, DR-CAFTA countries exported $7.8bn worth of apparel to the US.

Based on that figure, if Vietnam enters the TPP under its request for a non-yarn forward rule, export losses could total $1.95bn a year or nearly $6bn in the first three years of the TPP, according to Luis Estrada, general manager of Guatemala's top textile and apparel association Vestex.

DR-CAFTA members have teamed with US textile lobbies, notably the National Council of Textile Organizations (NCTO), to ask US Congress to pressure Vietnam to accept a yarn-forward rule of origin forcing it to limit sourcing from the TPP bloc. The partners are also asking that zero tariff benefits would also be granted over a number of years.

The TTP is currently being discussed by 12 countries including the US, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam - the last of which is the second-largest apparel supplier to the US after China. 

The US textile lobby - along with its allies in the DR-CAFTA region - is pushing hard to see all constitutive products in a garment, starting with the yarn and "going forward" - including linings, narrow elastic fabrics, sewing thread and pocketing - originate from, and be assembled in, one of the TPP partner countries if a garment is to enter the US tariff-free.

Without this yarn-forward rule, it fears the market will be flooded with Vietnamese clothing made from Chinese yarns and fabrics.

In contrast, campaigners representing brands, retailers and importers argue the rule as it stands is too restrictive, hinders new trade and investment in the sector, and renders most existing trade ineligible for preferential tariff treatment.

Instead, they want to be able to have the freedom to source inputs from the best suppliers, regardless of whether textiles from the US or partner countries are used.

They also point out that a number of grey areas remain - not least of which are the final terms of trade in the TPP, which are as yet undecided, along with any likely timeframe on when it will be completed.

And the prospect of a yarn forward rule - which is what US textile firms and the DR-CAFTA countries are requesting - is actually helping to fuel to increased textile investment into Vietnam, which would further shore up the country's competitiveness in the trade pact.

There is also a strong likelihood that instead of business being curtailed in Central America, the biggest losers to Vietnam's strength in the TPP are more likely to be other countries elsewhere in Asia.

Click on the following link to read: Central America fears textile losses of $6bn to TPP

With additional reporting by Leonie Barrie.