Cumulation Setback
Provision to send Mexican fabric duty free to Central America gets delayed
A much ballyhooed provision that would allow Mexican textile manufacturers to ship fabric to Central America free of duty and quotas has hit a major stumbling block.
An unforeseen legal matter that requires several agencies within the Mexican government to sign off on the provision has delayed the whole process by as much as two months.
Originally, Mexican textile groups were gearing up to ship goods to Central America by the beginning of March under a new provision to the Dominican Republic–Central American Free Trade Agreement. Now they will be lucky to get the green light by late April or early May.
The provision, known as cumulation, allows Mexico to export as much as 100 million square meters a year of woven fabric to Central American factories, where it is cut and sewn and then shipped to the United States free of quota and duties. That number can climb to 200 million square meters a year as trade grows.
Cumulation is a major boon to Mexican textile makers, who have been hit hard in recent years by competition from Chinese apparel and textile factories. At one time, Mexico was the No. 1 foreign apparel supplier to the United States after the North American Free Trade Agreement opened up the borders between Mexico, Canada and the United States in 1994. As recently as 2004, Mexico shipped $8.7 billion of apparel and textiles to the United States. That has been nearly halved in a matter of years. During the one-year period ending November 2007, Mexico’s apparel and textile exports dwindled to $5.64 billion, compared with China’s $32.5 billion in apparel and textiles shipments.
Rafael Zaga, president of Mexico’s National Chamber of the Textile Industry,or Caacute;mara Nacional de la Industria Textil, has spent years touting this amendment as a way to save jobs instead of seeing workers leave the country to find employment.
Likewise, U.S. companies with Mexican textile factories have been eagerly waiting for the cumulation provision to take effect.
“It is really important for the factories we have in Mexico that are making denim,” said Bo Dean, senior vice president of sales and marketing for Twin Dragon MarketingInc., based in Gardena, Calif. The company has a denim plant in Victoria, Mexico, that employs 1,000 workers. “We have a disadvantage against the U.S. mills that can ship to Central America duty and quota free [under DR-CAFTA].”
Cone Denim, one of the world’s biggest denim makers, has been a major backer of the provision, which will help boost production at its two Mexican denim plants. The matter became even more important for the company after 2006, when Cone Denim bought out its Mexican partner for $27.3 million to take full control of a denim plant in Parras de la Fuente, Mexico. The town is located about 90 minutes from Torreoacute;n, an important blue jeans–making center. Cone Denim also has a plant in Yecapixtla.
“We have spent the last 18 months integrating Cone Denim Parras into our network of facilities and investing in some additional capital down there,” said Cone Denim President Thomas McKenna. “So cumulation is a positive thing for the region. Any policy that supports stronger integration in the region and allows folks making jeans to move things around without the restraint of trade policy is a good thing.”
Bureaucratic nightmare
The road to cumulation has been arduous and long, filled with legislative wrangling and diplomatic maneuvers.
It’s been further complicated by the fact that there are seven countries that make up DR-CAFTA: the United States, Guatemala, Honduras, Nicaragua, El Salvador and the Dominican Republic; Costa Rica is still waiting to join the free-trade pact.
Last year, each country’s legislature had to amend its free-trade agreement with Mexico for the cumulation provision to go forward. That sounded easy, but the process ran into sticky territory. For example, Guatemala’s congress took a break at the end of May and didn’t reconvene until August. But presidential and congressional elections were scheduled in September, and run-off elections took place in November.
By late December, Guatemala and the other Central American countries had approved changes to their free-trade agreements with Mexico. Mexico had made its changes in April.
With all this completed, everyone thought the 60-day layover period, where diplomatic letters are exchanged, would be completed by early March to launch Mexican fabric south.
Then, in January, someone in the Mexican government realized that more internal government documents had to be signed before the 60-day layover period could start.
With this bureaucratic maneuver still waiting to be completed, everyone is wondering when cumulation will actually begin.
Scott Quesenberry, the special textile negotiator for the U.S. Trade Representative, said he believes it will go forward at the beginning of May.
“Even though the Mexicans had passed their [free-trade] agreements in April a little bit earlier than the other countries’ timeline, they hadn’t completed this internal process,” he said, noting they are working on this last step quickly.
Tom Travis, a customs attorney and free-trade expert with Sandler, Travis &Rosenberg in Miami, believes cumulation will take effect before the middle of the year. “Everything with CAFTA has been difficult with so many jurisdictions,” he said.
But a representative from Mexico’s National Chamber of the Textile Industry insisted it will be up and running by the end of April.
No matter when it happens, several Central American manufacturers are eagerly waiting for Mexican fabric to be the solution to cheaper production costs.
“We are considering using it for some of our customers,” said Carlos Arias, president of Koramsa in Guatemala, the largest bluejeans maker in Central America. The company sews jeans for Kohl’s, Gap Inc. and other major U.S. companies. “As you can imagine, Mexican mills are very eager to get the green light. They have been visiting us in hopes of landing production orders.”
However, Arias was disappointed that Central American customers would get the fabric on a first-come, first-serve basis instead of through a system that would allot a quota for each country or company. “We would have preferred a different system,” he said.
