California Apparel News

Crossing the finish line first doesn’t earn El Salvador a gold medal

If this were a perfect world, El Salvador would be praised for doing all the right things to become the first Central American country to officially join the Central American Free Trade Agreement.

Instead, El Salvador is being punished, particularly its apparel industry.

When CAFTA was finally approved by U.S. politicians last summer, no one imagined that all six Central American countries wouldn’t be joining the free-trade pact at the same time. The kickoff date for CAFTA was Jan. 1 when Guatemala, Nicaragua, Honduras, El Salvador, Costa Rica and the Dominican Republic were expected to climb on board.

But each Central American country has been adhering to its own timetable when it comes to passing legislation needed to implement CAFTA rules, such as lowering trade barriers and providing greater protection for copyrights and patents.

El Salvador completed the regulatory overhaul in time to join CAFTA on March 1. But now that it is a CAFTA member, it is no longer a member of another trade treaty called the Caribbean Basin Trade Partnership Act, which was initiated in 2000 to give duty-free status to apparel made in Central America out of U.S. fabrics formed from U.S. yarns. Also, duty-free status is given to certain knit apparel made from fabric formed in CBTPA countries out of U.S. yarns.

But here’s the bureaucratic glitch for the apparel industry in El Salvador.

If an apparel company in El Salvador imports fabric from Honduras or Guatemala— which haven’t officially joined CAFTA but are still CBTPA members—that apparel from El Salvador does not have duty-free status when entering the United States. If El Salvador were still a member of CBTPA, that apparel would enter the United States without paying any tariffs.

With U.S. textile duties averaging around 16 percent, that is a big dent in clothing companies’ profit margins. Last year, El Salvador exported nearly $2 billion in goods to the United States, nearly all of which was clothing.

“This is crazy,” said Jonathan Fee, a customs attorney in Washington, D.C., who deals with many textile issues. “Everyone wanted a seamless transition between CBTPA and CAFTA, and they’re not getting it.”

Government officials from El Salvador have asked the U.S. Trade Representative’s office to remedy the situation. Christin Baker, a USTR spokeswoman, said the Bush administration was aware of El Salvador’s concern and was working hard to bring the other countries into CAFTA. “We will work as quickly as we can to achieve a complete result,” she noted. But the USTR wants to make sure that all obligations under the agreement are met.

“This will have a disastrous effect on the industry in El Salvador,” said Tom Travis, a well-known customs attorney who is a managing partner with Sandler, Travis & Rosenberg in Miami. “The members of the administration said they intend to seek a remedy to the situation, but we feel the remedy might be too late for some.”

El Salvador will probably be able to recuperate these duties at a later date when all six Central American countries have joined CAFTA, but for right now they have to pay them.

“We are very concerned because El Salvador is one of our main fabric export markets,” noted Tony Malouf, export manager for Hilos & Telas, a 34-year-old fabric mill in Guatemala.

The new trade agreement provides a challenge for Central American clothing factories such as Industrias Merlet, a full-package operation in El Salvador that owns a fabric mill in Guatemala. Merlet, with nearly 1,000 workers, sends all its apparel to the United States. The company makes T-shirts, pants and underwear for such U.S. retailers as Gap, Kmart, Sears and Wal-Mart.

However, Juan Carlos Velazquez, the company’s director of sales and strategic development, is upbeat about the future. He believes the company will be able to recuperate the duties it pays on goods exported to the United States. “These are transitional circumstances,” he said from his office in Miami.

“The smaller companies that are not as solvent and liquid and don’t maintain a fairly good relationship with their customers might have some difficulties. But if you have a good relationship with your customer, then you look at this as the cost of doing business for a while.”

Countdown time

This transitional period will end when the rest of the Central American countries join CAFTA.

Nicaragua and Honduras are expected to be the next two countries to join CAFTA. That could happen some time between April and July. Guatemala isn’t expected to come on board before July 1. The Dominican Republic, a major apparel producer, announced it would also join the free-trade club in July.

Costa Rica still hasn’t approved the pact on the legislative level because the country recently had presidential elections in February, delaying the CAFTA process.

Oscar Arias, the presumed winner of the elections with a scant 18,000-vote lead, vowed to go forward with CAFTA. Meanwhile, Ottoacute;n Soliacute;s, the left-wing candidate who was in second place and may challenge the election, has vowed to oppose the freetrade accord.

Meanwhile, the two-trade treaties system has prompted U.S. apparel associations to try to get Congress to do something about the tariff discrepancy.

Kevin Burke, president and chief executive of the American Apparel & Footwear Association in Washington, D.C., sent a letter recently to U.S. Trade Representative Rob Portman and Commerce Secretary Carlos Gutierrez warning them that U.S. companies could abandon the region and move to Asia if the tariff issue isn’t resolved. Cass Johnson, president of the National Council of Textile Organizations, and Mark Lange, president and chief executive of the National Cotton Council, joined Burke in signing the letter.

“As you know, textile and apparel sourcing decisions can come down to pennies per garments,” the letter said. “The enormous duty costs and ongoing uncertainty associated with this technical problem could quickly send business to other regions, most likely Asia.”

Attorney Fee concurred: “People are taking a hard look at Central America right now,” he said. “Will CAFTA make it competitive with the Far East? If all people see is monkey business, delays and special rules, I think they will be skeptical. And skepticism means they will go to China.”