In the five years since the Central American Free Trade Agreement was implemented, U.S. and European apparel brands and retailers have faced sourcing challenges but are now said to be looking to increase business in the region.
While the recession hit Central America hard and led to a decrease in U.S. apparel import volume in 2009 and created an uncertain business climate for the seven CAFTA countries, trade has begun to bounce back in the past year and companies are now exploring new investment opportunities. Central America’s apparel and textile industry could attract significant apparel investment by 2015 as U.S. and European brands shift activities to offset deepening sourcing woes in Asia, industry experts said.
Related Articles
Retailers and brands such as Wal-Mart Stores Inc., J.C. Penney Co. Inc., Aéropostale Inc. and Hugo Boss are said to be ready to move some of their apparel sourcing to Central America, according to sources.
You May Also Like
Apparel import trade to the U.S. from the other signatory countries — Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica and the Dominican Republic — rose 19 percent to 3 billion square meter equivalents in 2010 compared with a year earlier, according to the Commerce Department’s Office of Textiles and Apparel. Not only has the region become a vibrant sourcing platform, it also serves as a major export market for U.S.-made fabrics and yarns. Textile exports rose 21 percent in 2010 to $2.49 billion, according to the National Council of Textile Organizations.
While Asia, and particularly China, has wooed large orders from U.S. and European brands for years, some of those contracts are now expected to go to Central America as China’s domestic clothing demand soars and labor costs rise.
“U.S. retailers and brands are very nervous about surging domestic demand in China,” said Walter Wilhelm, chief executive officer of trade consultancy Walter Wilhelm Associates. “They worry that Chinese producers will begin to focus on meeting internal needs and less on exports so they won’t be able to get as much stuff out and on time.”
China’s unions are also clamoring for higher wages while prices of key raw materials such as cotton have risen sharply, boosting production costs.
“Shipping rates are now higher than in this [Western] hemisphere and there are more labor woes, so major U.S. companies are looking to hedge themselves by moving sourcing elsewhere,” Wilhelm said.
A similar phenomenon is at work in India and Pakistan, where governments are forcing manufacturers to meet local demand, further squeezing export-linked production. While industry officials acknowledge that CAFTA has not lived up to its full potential, there is a growing consensus that the region is likely to attract new investment and continue to expand.
“It’s done some of what it was supposed to do,” said Nate Herman, vice president of international trade at the American Apparel & Footwear Association. “It has definitely maintained business in the region and created some new investment, but it just hasn’t been anywhere near what people were hoping because of the staggered implementation of the agreement and the recession.”
But conditions in Central America are beginning to improve. “The region is starting to get better and it’s starting to get a lot more fabric capacity,” said Herman.
Julia Hughes, president of the U.S. Association of Importers of Textiles & Apparel, said her members are “starting to take a fresh look at sourcing in the CAFTA region.”
“If you look at the trade numbers, most of them are up and I do think that reflects a positive and that companies are coming back,” Hughes said.
In a move that many said could help bolster business in the region, the Obama administration said last month that it had reached an agreement with the other countries to make technical changes to the trade accord, including increasing the amount of woven fabric from Mexico that can be used in apparel made in the region and lifting the restrictions on elastimeric yarns from the U.S. or the region, allowing those inputs to be imported from anywhere in the world. But the “fixes” must be approved by Congress and the legislatures of the six other CAFTA countries, which could take months and even years.
At the same time, Central America is working to implement a free trade deal with the European Union that could double its export market in 2013 when observers expect the treaty will come into full effect. The EU, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama signed an initial accord last May.
“This is going to be very interesting, especially for U.S. companies that strengthen their presence in Central America, as they will be able to access the EU market duty free,” said Alfonso Hernandez, ceo and chairman of Argus International, a jeans and uniform manufacturer with apparel factories in El Salvador and Nicaragua. “No other phenomenon has generated so many jobs in Central America and there have been huge investments. But the worst recession of the past 80 years happened, so much of what was gained was lost very quickly.”
Central America’s lack of manufacturing sophistication and delivery speed has kept producers on the fringe of an increasingly demanding global apparel and fast-fashion market. Apart from regional leaders such as Denimatrix and Los Volcanes Group, many have lacked the investment or know-how to move into a more high-tech, full-package production model. While some were moving in that direction, the credit crunch and ensuing financial squeeze made any restructuring efforts difficult.
Hernandez hopes Asian manufacturers will step up Central American investments to follow on the coattails of Hong Kong-based Li & Fung Ltd., which has established a successful full-package manufacturing enterprise, courting big brands, some of which have shifted their business from less nimble local suppliers. If an EU-Central America free trade deal is struck, European brands will probably invest en masse, observers add.
Meanwhile, the U.S. textile industry is benefiting from the rule of origin in the regional trade accord that requires apparel firms to use fabrics and yarns either made in one of the seven CAFTA countries.
“The timing was very rough for CAFTA but the fact is that CAFTA was very important for stabilizing the region,” said Cass Johnson, executive director of the National Council of Textile Organizations. “Now it looks like we may be on an upward trend and we think that is for both our industry and the CAFTA countries.”
Johnson said increasing labor and raw materials prices in China “favors the CAFTA region.”
“What our members are reporting is an increasing interest on the part of apparel companies to move some sourcing back to the region,” Johnson said.
Jim Chesnutt, president and ceo at National Spinning Co., which operates several yarn and dye plants in North Carolina, said the CAFTA region represents about 15 percent of the company’s export business.
“I would really not even want to think what this industry would look like without CAFTA,” said Chesnutt. “I think it has been a complete success and without it this yarn industry would be in a very difficult situation.”