California Apparel News

California companies that have invested in Central American apparel and textile factories are curtailing their expansion plans in that region until a free-trade agreement is in place.

No one is quite sure when the Central American Free Trade Agreement (CAFTA) will be passed by Congress, the last stop in implementing the accord, which would eliminate quotas and duties on many apparel goods imported from Guatemala, Honduras, Nicaragua, Costa Rica, El Salvador and possibly the Dominican Republic.

At the earliest, CAFTA could be approved by spring, Congressional sources said. But then again, it might not be approved at all. Initially, everyone had anticipated that the historic trade agreement would be a done deal by now.

“We are working with Congressional leadership to find the appropriate time for consideration,” said Neena Moorjani, a spokeswoman for the U.S. Trade Representative’s office in Washington, D.C., which negotiated the agreement signed by President Bush on May 28.

CAFTA opponents, particularly the U.S. textile and sugar industries, have promised a heated battle. Proponents are honing their lobbying skills to persuade fence sitters and new Congressional delegates to back the legislation.

Meanwhile, companies such as Twin Dragon Marketing Inc., based in Gardena, Calif., are worried about the delay and its effect on their Central American business.

“Our business in Nicaragua is not good,” said Bo Dean, senior vice president of marketing and sales at Twin Dragon. “Everything is hanging on hold until we figure out how things are going to come along. We’ve been in limbo for two years.”

Twin Dragon—which manufactures denim, corduroy, twill and stretch fabrics in Asia, Mexico and the United States—opened a textile dyeing and finishing factory in Nicaragua two years ago along with a sewing facility that does mostly pants. The idea was to warehouse fabric in Nicaragua, dye it to precise orders, sew the garments and then ship the goods back to the United States for quick-turn orders that would be done in seven to eight weeks.

But that idea hasn’t been as popular as Twin Dragon thought it would be. “The only business I am getting is from people trying to do a little business in Central America to be prepared for when CAFTA comes through,” Dean said.

The uncertainty swirling around CAFTA is also putting a dent in the entrepreneurial aspirations of E & J Textile Group, based in Hawthorne, Calif.

The company—which does fabric knitting, dyeing and garment manufacturing in Hawthorne— opened a large sewing facility in Nicaragua in 2001 and expanded it in 2003. E & J now employs 800 people who produce 1.5 million knit tops and bottoms a month for Wal-Mart Stores Inc., J.C. Penney Co. Inc. and Kohl’s Corp.

James Chung, vice president of sales and marketing at Textile Unlimited Corp., a division of E & J, said he wishes to expand but will hold off until CAFTA goes through. “We want to establish a dye house and knit fabric facility in the future, but not at this time,” he said.

Talking points

For years, Central America has been an economical apparel manufacturing site for U.S. clothing companies looking for an alternative to China and India. The Caribbean Basin Initiative, signed by President Ronald Reagan in 1983, fostered that business. In 2000, the initiative was updated with the Caribbean Basin Trade Partnership Act, which gives duty- and quota-free status to apparel that is cut and sewn in Central America but is made out of U.S. yarns and fabric. In addition, duty- and quotafree status is given to clothing made in Central America with knit fabrics that have been produced in Central America from U.S. yarns.

CAFTA, however, changes the rules slightly. U.S. textile companies have been able to stay alive by selling their fabrics to Central American garment manufacturers who want to export their goods to the United States free of quotas and tariffs. In 2003, the U.S. textile industry exported $2.36 billion of fabric to Central America, up from $2.23 billion in 2002 and $1.68 billion in 2001. Under CAFTA, apparel made in Central America from fabric manufactured in Mexico, a major denim and twill producer, and Canada, would also enter the United States free of quotas and tariffs.

In addition, trade preference levels would allow certain yarns and fabrics from third countries such as China to be used in garments made in Central America and then shipped to the United States duty free. Nicaraguan manufacturers would be able to use up to 100 million square meters of fabric in their garments and export them to the United States duty free.

Furthermore, any yarns or fabrics considered to be in short supply in the United States or Central America could be used in Central American–made clothing and exported to the United States duty free.

These provisions have rallied most U.S. textile companies to oppose CAFTA in its current form. “How does supplying Central American countries with Mexican denim help American textile companies?” asked Jock Nash, the Washington lobbyist for Milliken & Co. in Spartanburg, S.C., one of the largest textile companies in the United States.

Nash said he will be lobbying newly elected and veteran U.S. representatives to keep the free-trade agreement from passing.

“I think the administration is running out of steam,” Nash said. “I think they are going to have a very hard time to get it passed.”

Proponents beg to differ. Bill Morley, the legislative analyst for the U.S. Chamber of Commerce, is hoping to see a vote pass this spring. “Our take is that it is all systems go,” he said.

And Steve Lamar, senior vice president of the American Apparel & Footwear Association, which also backs CAFTA, is optimistic there will be a free-trade agreement. “I think there will be a fight,” he said. “But I think it will go through.”

Still, the uncertainty is weighing on businessmen such as Carlos Arias, executive vice president of Koramsa, a Guatemalan manufacturer that makes 700,000 pairs of denim pants a week for such major U.S. companies as Gap Inc. and Levi Strauss & Co.

“Our customers believe that a Central America without CAFTA is a weak sourcing region,” Arias noted. “The delay brings uncertainty to the market, and it is bad for Central America.”