- The Washington Times - Tuesday, July 4, 2006

The Central American Free Trade Agreement isn’t working out as planned.

“It’s caused a lot of apparel importers a lot of pain,” said Jason Copland, president of Copland Industries, a Burlington, N.C., manufacturer. Copland exports material to Central America, where companies sew it into clothes that are bound for U.S. stores.

CAFTA was supposed to boost U.S. trade with six Latin American nations. Instead, the one-at-a-time addition of countries has complicated and disrupted commerce, with an especially sharp effect on the textile and apparel industries.

Congress approved CAFTA less than a year ago after a bruising political battle. The agreement was set to take effect Jan. 1, but U.S. trade officials said the Latin American nations had not sufficiently changed their laws to meet terms of the deal. Some countries still have not.

The U.S. enacted CAFTA with El Salvador March 1 and with Honduras and Nicaragua a month later. Guatemala joined Saturday. The four countries are fully participating in the agreement.

The Dominican Republic likely will accede later this year. Costa Rica’s legislature has not approved the accord and may not join until December or later.

El Salvador’s reward for being first was a sharp decline in exports to the United States, from $187 million in March 2005 to $88 million this March, U.S. International Trade Commission data show.

Much of that drop occurred in the textile and apparel industry.

Before CAFTA, El Salvador had easy access to the U.S. market under a trade program for Caribbean basin countries. The country was allowed to use thread and other components from 22 countries in the region and export finished products with duties averaging 4 percent to 6 percent.

Once the country joined CAFTA, it gained access for more products, but could use components only from the United States or other CAFTA countries. The problem was, no other countries were part of CAFTA. Because El Salvador was using materials from countries that had not implemented CAFTA, duties temporarily jumped to an average of 14 percent.

“Goods not subject to duty before [CAFTA] are subject to duty now. It’s a disaster,” said Mr. Copland, who last year opposed the deal because of provisions that allow Chinese fabric to be incorporated into Central American-sewn clothes.

Trade with other CAFTA countries also has been disrupted. U.S. apparel imports from the six-nation region are down almost 18 percent by volume from January through April, compared with the same period last year.

It is an especially troubling development for the hemisphere’s textile and apparel industry, which has been losing ground to imports from Asia, especially China.

CAFTA is supposed to set up the region as a competitive bulwark against Asian companies, with fabric and yarn from high-tech U.S. factories sewn into garments by Central America’s low-cost labor.

So far, it is not working that way.

“Absolute imports [from CAFTA countries] are dropping. Market share continues to tank. [U.S.] yarn exports are flattening and fabric exports to the region are way down. None of these are good trends,” said Stephen Lamar, senior vice president at the American Apparel and Footwear Association, a Washington trade group.

Still, Mr. Lamar said, it is too soon to write off the trade accord.

“There’s clearly hope that it is going to get squared away. The challenge will be to make sure there isn’t a loss of confidence in the region and the program,” he said.

Countries that signed on to the agreement have not lost enthusiasm. El Salvador credits CAFTA for salvaging its apparel industry from Chinese competition and for boosting foreign investment.

“So far, the implementation of CAFTA has been a huge benefit for the Salvadoran economy,” said Rene Leon, the country’s ambassador to the United States.

The Bush administration says the problems are temporary glitches.

“We will see an expansion of trade,” said a U.S. trade official who asked not to be named. “We have this startup cost, but as more countries come on board, the situation will get better.”

The initial setbacks have not stopped major investments in Central America, and some companies remain optimistic the deal will help the United States and Central America compete against Asia.

Cone Denim, for example, earlier this year announced a $90 million investment in Nicaragua to build a denim-manufacturing plant. The facility will employ about 750 people and support as many as 20,000 additional jobs at sewing operations, said John Bakane, president and chief executive of Cone Denim, which is part of the International Textile Group conglomerate.

“We still think there is a very important place in the U.S. supply chain for Central America,” Mr. Bakane said from the company’s Greensboro, N.C., offices.

The countries provide cheap labor (Nicaragua has lower wages than China), have stable currencies and are close enough to the United States to respond quickly to fashion trends, he said.

“The one thing that the Central American countries need to do to capitalize on this opportunity is to work as a seamless region,” Mr. Bakane said. “That hasn’t happened yet.”

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