MEXICO CITY — A worsening crisis in Nicaragua and growing political risks across Central America are threatening to cripple sourcing and investment just as the region was set to benefit from the U.S.’ escalating trade war with China.
“This is a constant source of worry and concern,” Steve Lamar, executive vice president of the American Apparel and Footwear Association, said of the Nicaraguan upheaval, which has killed 440 people and wounded 2,800 in 100 days of antigovernment protests, a human rights watchdog said Saturday.
“The humanitarian crisis is deeply troubling and the lack of a predictable business environment is worrying folks who have workers and want them to be safe.”
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Early this month, Adidas, Gap Inc., Under Armour, Patagonia, New Balance and Nike Inc. joined others in demanding that President Daniel Ortega respect the rule of law, stop “excessive force” by security forces and honor freedom of expression and assembly in the impoverished nation, adding that their sourcing operations were being directly affected.
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Lamar would not comment on rumors that some labels — notably Adidas — are considering exiting Nicaragua as many scramble to shift apparel production to nearby Guatemala, Honduras or El Salvador.
“Each brand will need to make that decision [to leave] depending on their equity in the country and how they feel about the situation but the crisis is starting to show in the trade statistics,” he said.
On Monday, the Trump administration issued a statement criticizing the actions of the Nicaraguan government. “The United States strongly condemns the ongoing violence in Nicaragua and human rights abuses committed by the Ortega regime in response to protests. After years of fraudulent elections and the regime’s manipulation of Nicaraguan law — as well as the suppression of civil society, opposition parties and independent media — the Nicaraguan people have taken to the streets to call for democratic reforms,” the administration said, adding it had authorized another $1.5 million “to continue support for freedom and democracy in Nicaragua.”
In recent years, Nicaragua has worked to lure U.S. brands on the argument that ultracheap labor and stable politics proved advantageous, climbing to the number 10 supplier.
“But now they are number 11 and if it weren’t for this crisis, they would be eight or nine,” said Lamar, adding that exports from neighbors Honduras and El Salvador are also starting to lag.
“CAFTA imports are down 1.4 percent over the past five months and last year they were down four percent to $2.9 billion, so the trend is not looking positive,” Lamar added.
Nicaragua is one of seven countries making up the Dominican Republic-Central American Free Trade Agreement, a trading bloc that includes Guatemala, El Salvador, Honduras and Costa Rica.
As Trump threatens to slap $200 billion of tariffs on China, the Central American nations were expected to draw new sewing orders, observers said. However, an air of instability is permeating the region, potentially jeopardizing that windfall.
Ricardo Barrientos, lead economist at the Central American Institute for Fiscal Studies, or Icefi, said anticorruption protests in the run-up to next summer’s Guatemalan elections could fuel instability in President Jimmy Morales’ government, which he branded as a “zombie that is not doing anything.”
In historically violent El Salvador, February’s elections could also cause trouble while a disputed Honduran presidential win in January could unleash fresh turmoil, Barrientos added.
Icefi expects foreign direct investment in the region to decline 8 percent this year after gaining 10 percent to $14.3 billion in 2017.
Nicaragua could lure roughly $700 million, down from $816 million in 2017, said economist Walter Rodriguez. Textiles and apparel comprise about 15 percent of all FDI going to Central America, he added.
Miguel Ruiz, who leads Nicaraguan trade union Confederación Sindical de Trabajadores José Benito Escobar, said 120,000 apparel jobs are in danger. This is because Gildan and Sae A Technotech recently froze planned investments of $100 million and $10 million, respectively, to expand production of synthetic fiber sportswear.
Ruiz added Hansae International, Istmo Textil and New Holland Apparel have also been severely affected, with clothing deliveries delayed about a month, as they scramble to shift output to Honduras, El Salvador and Guatemala.
“We have had about 15 days of normal production this year,” said Ruiz, adding that production has largely resumed after a two-month halt. He conceded that Nicaragua’s exports to the U.S. will likely fall sharply this year, but would not provide a specific target.
Alejandro Ceballos, president of Guatemalan apparel lobby Vestex, disagreed that full production has returned, saying output in Managua’s Carretera Masaya (an industrial pole) remains idled as gangs block shipments.
“There are 50,000 operatives in Masaya where most factories are and most are not working,” said Ceballos, adding that Guatemala is taking over much of Nicaragua’s production.
As U.S. brands sent higher-end polos, knit shirts and denim trousers to neighboring Guatemala, exports surged 12 percent in the first half of the year, according to Ceballos, who said Guatemalan apparel investment will rise 400 percent to $40 million in 2018.
“There are four new factories of $10 million each planned to make polyester knit” as Guatemala lacks the necessary synthetics feedstocks to make value-added activewear though it sewing needle is said to be better than neighbors.
Ilse Metchek, president of the California Fashion Association, said Guatemala has become the region’s most reliable sourcing spot.
“Guatemala is protective of their image and has a group of watchdogs that will accompany you if you have a problem,” she said. “If you go into Nicaragua, Honduras or El Salvador it is like the Wild Wild West. You are on your own.”
Yet Central American turmoil is stoking concerns that truck theft or factory ransoms (where gangs block shipments from leaving until additional payments are received) could increase. While these events have not hit worrisome levels, “it has given companies pause about the safety of their personnel,” she added. “If they have to hire security guards to go in and out of factories, that is a problem.”
Karin de Leon, executive director of the Central American-Dominican Republic Council of Textiles and Apparel, said investment has not waned, except in Nicaragua.
“We continue to see groups coming to Guatemala and Honduras and in Honduras we have seen more concrete investment for the 2020 plan,” which aims to transform the tiny Caribbean nation into a major activewear manufacturer, drawing yarn investments.
“The uncertainty about China and NAFTA’s negotiations” continues to draw interest in Central America, de Leon insisted, adding that investment trends have not changed to reflect the perception of growing risks.