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Regional Support In A Global Fight

After difficulties in passing CAFTA-DR, real commitment to the region will be necessary to keep the promise of the agreement.

Jim Borneman, Editor In Chief

T he current political environment in the United States — with its support of global free trade and a path toward tariff-free access around the world — creates difficulties for the achievement and implementation of the Central America-Dominican Republic Free Trade Agreement (CAFTA-DR), which may fall short of supporters’ promises of increased trade and regional stabilization.

The agreement brings the promise of quota-free, tariff-free trade between the United States and Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic. For many, it is an extension of the North America Free Trade Agreement (NAFTA) and a step toward the Free Trade Area of the Americas (FTAA). For others, it is an agreement made obsolete by both the World Trade Organization (WTO) and a policy shift away from hemisphere-based trade to global free trade.

With a history stretching back to the Multi-Fiber Arrangement (MFA) of 1974 — which provided for import quota limits by which developed countries could manage market disruptions — and later, the Agreement on Textiles and Clothing (ATC) — which set a course for eliminating those same quotas under a WTO agreement in 1995, textile trade has a history of being tossed about by shifting trade policies that often were meant to be an incentive for economic development and support for developing democracies. NAFTA, which added Mexico to the US/Canadian trading bloc, the Caribbean Basin Initiative (CBI) and Caribbean Basin Trade Partnership Act (CBTPA) are the legacy of regional trade policies that seem to have been superceded by the rise of the WTO, China’s entry into the WTO, and the trend toward global tariff reduction and elimination.


CAFTA-DR Policy Brief

The Office of the United States Trade Representative (USTR) offered a policy brief on CAFTA-DR in February 2005, prior to the Senate and House battles over the agreement. There were disputes within the textile industry and its various associations as to whether CAFTA-DR would help or hurt the US textile industry. During the legislative process, changes and promises that affected components of the agreement zeroed in on CAFTA-DR’s proposed effect on individual companies in individual districts. By way of review, the brief pointed to nine key points affecting textiles:
• Yarn-Forward Rule Of Origin
Only apparel using US fabric or yarn qualifies for duty-free benefits. The rule applies to no less than 90 percent of Central American apparel exports to the United States.
• Immediate Duty-Free Access
Reciprocal duty-free access for all goods is retroactive to Jan. 1, 2004.
• Cumulation
The cumulation provision allows for capped inputs from Mexico and Canada to be used in Central American/Dominican Republic apparel that will still qualify for duty-free benefits in the United States.
• No Trade Preference Levels (TPLs) For Major Central American Suppliers
CAFTA-DR does not include TPLs for El Salvador, Costa Rica, Honduras and Guatemala. It does contain a TPL provision of 100 million square meters for Nicaragua that will phase out over 10 years.
• Tough Customs Enforcement Procedures
Surprise Central America site visits by US Customs authorities are permitted. The United States also may bar entry of suspect goods.
• Textile-Specific Safeguard
The United States may impose tariffs on certain goods when injury occurs as a result of import surges.
• New Benefits For Thread And Elastics
Thread and narrow elastics, as well as visible linings, must originate in the United States or a CAFTA-DR country.
• Flexibilities
There are narrowly tailored provisions instead of TPLs to address Central American concerns.
• Short Supply Process
The agreement implements a new short supply process with tighter timelines than previously, and allows partial short supply items as well as additions and removals from the list.

The USTR offered the brief as an overview. Many details brought forth concerns that had been overlooked, and as with every agreement, the unexpected happened.

One difficulty was the procedural problem that as countries entered the agreement, they lost CBTPA benefits and were in a legal no-man’s-land, waiting for other countries to join. Hence, rolling admissions came to pass as a way to accommodate the changes. Additionally, changes to the original agreement in order to get it passed by US lawmakers rankled Central American governments, as they needed to adjust their laws to meet provisions on intellectual property, foreign investment and domestic economic protection.
CAFTA-DR Textile Imports In Dollars
Considering the alphabet soup of agreements and organizations associated with trade — including NAFTA, CAFTA, CBTPA, FTAA, AGOA and WTO — just what is the textile impact of the CAFTA-DR countries on US trade?

US Department of Commerce, Office of Textiles and Apparel (OTEXA) data shed some light on the subject. Through the MFA category system, the region — Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic — shipped textiles worth more than $9 billion into the United States in each of the last three years, with roughly $400 million less shipped in 2005 than in 2004. On a percentage basis, this trade in 2005 accounted for 10.3 percent of total textile imports to the United States. Among CAFTA-DR countries, Honduras was the largest shipper in dollar value followed by the Dominican Republic, Guatemala, El Salvador, Nicaragua and Costa Rica in that order.

Nicaragua, though not the largest exporter, does show a positive trend, growing from $484 million in textile exports to the United States in 2003, to $595 million in 2004 and $716 million in 2005.

In terms of product groups — or aggregations, in OTEXA terminology — 15.8 percent of the cotton apparel imported into the United States in 2005 came from CAFTA-DR countries. Additionally, 11.7 percent of the man-made fiber apparel came from the region that year.

The three most significant categories from the region for the last three years — 2003, 2004 and 2005 — were category 339, women’s and girls’ knit cotton blouses; category 338, men’s and boys’ knit cotton shirts; and category 352, cotton underwear. In terms of share of total textile imports into the United States, 47.9 percent of the imported cotton underwear that entered the United States in 2005 came from the CAFTA-DR region and represented $1.24 billion. The $221 million worth of cotton hosiery under category 332 represents 32.3 percent of the US imports in that category for that year.

CAFTA Countries

Following is a snapshot of the CAFTA-DR countries, their top 10 textile exports to the United States and their economies.

Download the CAFTA-DR country snapshot.

CBTPA and the African Growth and Opportunity Act (AGOA) were passed by the US Congress under the Trade and Development Act of 2000. In October 2000, then-President Bill Clinton signed proclamations designating 34 sub-Saharan African countries to participate in AGOA and extending benefits of 24 Caribbean and Central American countries from the 1984 CBI program.

According to US Department of State background information on Caribbean Basin trade enhancement, “[t]he main benefit of the CBTPA is duty-free and quota-free entry for US imports of apparel sewn and assembled by CBI countries from US cloth and yarn; this product sector had been excluded from the original CBI law but provided to Mexico by NAFTA. After 1994, CBI countries asserted that Mexico’s superior trade terms were harming their trade. … The CBTPA program was implemented in October 2000 and will last through September 2008, or before that if the [FTAA] enters into force first.”

After getting the nod from the US House Ways and Means Committee in a 25-to-16 vote, and passing the US Senate in a 54-to-45 vote on June 30, 2005, the House approved CAFTA-DR by a nail-biting 217-to-215 vote at midnight on July 28, 2005. While Costa Rica has yet to ratify CAFTA-DR as of TW ’s press time, the Dominican Republic, Honduras, Guatemala, El Salvador and Nicaragua have approved the agreement. President George W. Bush issued a proclamation of implementation for El Salvador on March 1, 2006. Honduras and Nicaragua entered the agreement in full force on April 1, 2006. Guatemala and the Dominican Republic have yet to enter in full force as of press time.

ITG Invests In Nicaragua

The Greensboro, N.C.-based International Textile Group (ITG) has entered into an investment agreement with the government of Nicaragua whereby ITG will spend close to $100 million to build a 28 million-yard-capacity denim plant.

ITG plans to build the facility in the Jorge Bolaños Abaunza Textile Park in the country’s capital, Managua. In searching for a site and finalizing the agreement, the company received assistance from investment promotion agency ProNicaragua’s Executive Director Juan Carlos Pereira and his team; as well as from Ramon Lacayo, executive director of the Free Zone Corp., and his team.

“By building a world-class Cone Denim plant in the region, we are fulfilling a commitment to all the countries and all our customers throughout Central America to ensure that this region remains an attractive and successful sourcing option for our denim jeans customers for years to come,” said Wilbur L. Ross Jr., chairman of ITG’s Board of Directors, and CEO and chairman of NewYork City-based investment firm WL Ross & Co. LLC, which funded the acquisition and merger of Burlington Industries Inc. and Cone Mills Corp. into ITG.

The new plant will be the largest ever constructed in Nicaragua, representing an investment equal to 2 percent of the country’s total annual gross domestic product, according to Alejandro Arguello, Nicaragua’s minister of development, industry and trade.

“By actively committing to support Cone’s expansion to Nicaragua, we are reinforcing that Nicaragua is open for CAFTA business,” Arguello said.

Ross Comments On ITG's Plans

Ross and Nicaraguan President Enrique Bolaheld a joint press conference to publicize the deal.

"Today marks a special occasion for the International Textile Group and me personally," Ross said. "It was just over two years ago that we formed ITG through the merger of Burlington Industries and Cone Mills. We did so with the strategic vision of repositioning the US textile industry by taking its marketing and textile know-how global. "

"Some of you may recall that in May 2004, following a trip to Central America, we announced the building of a facility in this region, pending passage of CAFTA. ITG was one of the first US textile companies to support CAFTA, and we were resolute in our efforts to get it passed. "

"At the time, we did not anticipate how difficult it would be to enact CAFTA legislation. In retrospect, it was well over a year before our government enacted CAFTA with passage by a slim margin and almost two years before the first Central American countries El Salvador, Honduras and Nicaragua ratified their participation. "

"In fact, during this time, our initiatives in the Far East moved to the forefront of our strategy," Ross continued, "and as we speak, facilities are currently under construction in China for our Cone Denim, Burlington House and Burlington WorldWide businesses. More recently, we announced, along with our partner Vinatex/Phong Phu, plans to build a Burlington WorldWide complex in Vietnam servicing the cotton twill market in that region. "

"But despite the delay in implementing CAFTA, we are now fulfilling our commitment to both our customers and this region by moving forward with the construction of a state-of-the-art denim facility in Nicaragua. "

"This facility will be located in the Jorge BolaAbaunza Textile Park in Managua. The plant will have an operating capacity of 28 million yards and is expected to employ 750 people. ITGs investment will approach $100 million. ITG has also acquired an option on an adjacent parcel of land in the same park for a potential Burlington WorldWide facility. "

“On behalf of ITG, and WL Ross, I would like to thank President Bolaños and his staff, the ProNicaragua promotion authority, the Free Zone Commission and the Free Zone Corp. for the long hours they have dedicated to this project. I would also like to thank the governments of El Salvador, Guatemala and Honduras for working with us on this project, and I want to assure them of our commitment to the region.

“Make no mistake, this is a monumental project for Central America, and Nicaragua in particular. Indeed, our friends in Nicaragua tell us that this facility will be the largest structure ever built in their country. But our task has now only begun, and we look forward to working with our Nicaraguan partners to achieve a successful start-up of this facility in the second half of 2007.

“In closing, I want to say how pleased I am for the citizens of Nicaragua and the region. With operations throughout the world, we have witnessed first-hand the opportunities that have arisen from the development of these plant communities. While our plant will employ 750 people, the potential downstream effect in the region will be the addition of thousands of jobs in the apparel manufacturing and support industries.

"We are anxious to begin construction and look forward to exciting new opportunities in the region," Ross concluded.

May/June 2006