California Apparel News

The Central American Free Trade Agreement was supposed to spell s-u-c-c-e-s-s for the region’s apparel industry. Instead, it is translating into frustration.

CAFTA, an elaborate treaty designed to give clothing manufacturers in countries such as Guatemala and El Salvador a leg up on their strongest competitor, China, was to go into effect Jan. 1.

But it will be months before most of the six Latin American signatory countries of Costa Rica, Honduras, the Dominican Republic, Guatemala, El Salvador and Nicaragua will benefit from the accord.

The holdup? None of the Central American countries has revamped its domestic laws to comply with CAFTA’s rules and regulations.

The procedure for adopting CAFTA requires each country’s congress to ratify the treaty. The next step is for each country’s congress to adopt a package of new laws that comply with CAFTA regulations.

Many Latin American legislative bodies took a long holiday break and are now just gearing up again.

So days before the new year dawned, the Bush administration announced it was planning to implement the accord on a country-by-country basis.

“The United States will continue to work intensively with [trade agreement] partners to bring them on board as quickly as possible,” said Stephen Norton, a spokesman for the U.S. Trade Representative in Washington, D.C. “Several countries are close.”

El Salvador will probably be the first to step up, aiming to take full advantage of CAFTA by Feb. 1. On Dec. 15, that country’s congress approved a legislative package expected to be sent soon to President Antonio Saca. Guatemala may follow soon after.

However, the Dominican Republic isn’t expected to be up and running until July 1, and Costa Rica’s lawmakers haven’t even ratified the accord, the first step before hammering out a legislative reform package.

Opposition to CAFTA has been strong in Costa Rica. Plus Costa Rica is holding a presidential election on Feb. 5.

Downshift

Meanwhile, the region’s apparel factories are mired in problems as some U.S. clothing companies shift their production to other free-trade countries or Asia. The result has been harsh for countries such as Guatemala.

Last year, 30,000 Guatemalan apparel workers, or about 21 percent of the industry’s workforce, lost their jobs, said Carla Caballeros, general manager of Vestex, a trade group made up of Guatemala’s apparel and textile exporters.

About 9,000 of those job losses came from Koramsa, the country’s biggest apparel manufacturer, whose workforce in Guatemala City has been whittled down to 10,000 workers, Caballeros said. Early last year, Koramsa was making 700,000 pairs of blue jeans a week for big customers such as Gap Inc., Levi Strauss & Co. and Lands’ End. As recently as last May, Carlos Arias, Koramsa’s executive vice president, was predicting that production at the sprawling factory the size of a small city would hit the weekly production mark of 1 million blue jeans.

But with Gap’s business suffering and Levi’s taking much of its business elsewhere, Koramsa is making only 250,000 pairs of blue jeans a week, Caballeros said. “Koramsa now is restructuring its business model,” said the Vestex official.

Koramsa executives, currently discussing reorganization plans, did not return phone calls or e-mails.

Shin Won Guatemala S.A., another major Guatemalan clothing maker that manufactures knit tops and other items for such companies as Wal-Mart Stores Inc., Target Inc. and Kmart, employed as many as 3,000 workers three years ago, according to Vestex. Now there are only 600 workers on the vast industrial campus that has its own soccer field. The Korean-owned factory has sent much of its sewing business to its factory in Vietnam, where workers make much less than their Guatemalan counterparts, who earn about $350 a month. However, Vietnam is still subject to U.S. apparel quotas and duties.

The reductions will start to have an effect on Guatemala’s trade figures this year as many orders were already shipped for the Holiday season.

“CAFTA needs to be implemented immediately,” Caballeros said, estimating that another 22,000 apparel jobs could be lost in 2006 if U.S. companies aren’t convinced that Central American factories offer advantages such as speed to market. “Many investments are dependent on CAFTA, and CAFTA isn’t a reality yet.”

Wait and see

Likewise, El Salvador is having a tough time. “El Salvador has suffered equally,” said Walter Wilhelm, a U.S. apparel consultant who was working with the El Salvadoran government last year to attract more industry to the country. The result is that in 2004, 6,000 apparel and textile workers, or 3 percent of that sector’s workforce, lost their jobs. It was the first decline in a decade. Figures are not out yet for 2005.

“Like all players worldwide, El Salvador’s apparel industry is coming out of a period of some uncertainty that demanded deep changes in view,” observed Jose Ignacio Lemus, who covers the apparel industry for the El Salvadoran investment bank Banco Multisectorial de Inversiones. “Readjustments forced some companies to close, but also it is bringing many others to Salvadoran soil.”

He noted that the textile industry recently formed the Textile and Apparel Industry Chamber to attract more business to El Salvador. As a result, Lacoste is planning to open a manufacturing plant in the country. Swisstex Inc., a Swiss textile firm, is joining forces with a Salvadoran apparel producer to improve service to the U.S. market.

And Fruit of the Loom, which has been in the country for a decade and employs 10,600 workers at seven plants, announced in November that it would be expanding its cutting operations.

“All these new investments are creating demand on labor that will absorb lost jobs experienced during 2005,” Lemus said.

El Salvador was the first country to ratify CAFTA and adopt a legislative package, but many garment factories have not been prepared to offer full-package deals, where they are responsible for securing the fabric and trim, sewing the garments and then shipping them back to the customer. “The major U.S. companies are all looking for full package now. And that is creating a problem for the factories in El Salvador,” Wilhelm said. “Those that have it are doing well.”

Wilhelm pointed to success stories such as Confecciones del Valle, or Valley Manufacturing, the apparel division of the Hilasal Group, the region’s largest towel manufacturer. Valley Manufacturing’s 2,000 workers make knit tops and bottoms for big companies such as Sara Lee Corp., men’s loungewear for Polo Ralph Lauren, and mattress and pillow coverings at three factories. Salvador Llort, the company’s executive vice president, said that last year the company embraced the full-package system, which helped the company grow. “We have seen many new potential customers wanting to get production started in the region and who are in the process of searching for the right factory,” he noted. “This year we are planning to consolidate and improve on what we have.”

But for many, interest in the region still hasn’t translated into action. Bo Dean, senior vice president of sales and marketing at Twin Dragon Marketing Inc. in Gardena, Calif., a twill and denim company, took prospective clients on a tour of his company’s Nicaraguan dyeing and finishing facility two months ago. At full capacity, the plant can produce 3 million yards of fabric a month. But it’s not even close to producing that amount. “I think things are going to gear up after this CAFTA thing,” Dean said. “But it is going to take a bit. As of two months ago, we were at one-third of capacity in Nicaragua. But we hope that could change overnight.”

CAFTATextile and Apparel Exports to the United States Country Year Ending Oct. 2004 Year Ending Oct. 2005

Honduras $2.61 billion $2.65 billion

Dominican Republic $2 billion $1.9 billion

Guatemala $1.89 billion $1.896 billion

El Salvador $1.74 billion $1.67 billion

Nicaragua $567 million $688 million

Costa Rica $518.8 million $491 millionSource: International Development Systems