Election, War Delaying CAFTA

First there was NAFTA. Will there be CAFTA?

The Central American Free Trade Agreement, touted as the key to making Central America competitive with China in apparel making, is on life support.

The free-trade observers who thought Congress would pass the historic trade agreement this spring had not counted on the Iraqi war and election politics getting in the way.

“I am not hearing good things,” said Kevin Burke, president and chief executive of the American Apparel & Footwear Association (AAFA), a trade organization representing apparel and footwear manufacturers that supports CAFTA.

The uncertainty surrounding the Central American accord is playing havoc with apparel companies that soon must decide where to place their Spring 2005 orders. Central American factories are concerned, too. According to an AAFA study last year, unless CAFTA is passed, Central America will likely lose significant U.S. market share in big-volume categories such as cotton knit shirts, cotton and manmade-fiber woven shirts, and cotton trousers and shorts when quotas are removed at the end of 2004 for World Trade Organization members.

“People who are doing Spring [2005] production are placing orders between now and July,” said Bruce Berton, director of international business consulting at Stonefield Josephson Inc., an accounting firm in Santa Monica, Calif., that advises apparel and textile companies. “They are wondering, ’Should I place those orders in China or in Guatemala?’”

If those orders are placed in China or other Asian countries, it could be difficult for Central American factories to win back business, international business experts observed.

Many are predicting that CAFTA, modeled after the 10-year-old North American Free Trade Agreement—which commercially links the United States, Mexico and Canada— won’t be passed until at least after the presidential election in November.

That is dangerously close to the date when apparel quotas from China and other WTO members will theoretically disappear: Jan. 1, 2005.

CAFTA stipulates that goods made in Central America with U.S. fabrics and yarns return to the United States duty- and quota-free.

Ticking clock

On Feb. 20, President George Bush notified Congress that he intended to sign the agreement with Guatemala, El Salvador, Nicaragua, Honduras and Costa Rica. Trade between the United States and these five countries totaled $23.2 billion last year.

On March 25, the Bush administration gave notice that it would also sign the agreement with the Dominican Republic, which joined CAFTA late.

At the earliest, Bush could sign CAFTA on June 24 before sending the pact to Congress for approval.

But now the long-suffering trade agreement has become a political football in an election year when few U.S. representatives or senators want to be accused of sending apparel and textile jobs out of the country.

“CAFTA is dead in the water,” said Lloyd Wood, spokesman for the American Manufacturing Trade Action Committee, a lobbying group representing U.S. textile mills opposed to the trade accord. “Basically, with the agreement you are talking about giving away 500 million to 700 million square meters of production to China through various loopholes in CAFTA that would allow thirdparty yarn and fabrics [to be used in Central America].”

John Kerry, the Massachusetts senator who is the presumptive Democratic presidential nominee, said he opposes CAFTA as it is currently worded because it does not contain sufficient labor or environmental protections.

U.S. Sen. Elizabeth Dole, a Republican from North Carolina, where 13,600 textile jobs were lost last year, said she would not support CAFTA in its current form if it comes up for a vote this year in the Senate.

Trade experts who would like to see CAFTA passed before the election know they are being optimistic.

“I think there are a number of [U.S.] representatives and senators who would like to move CAFTA forward, but as we get caught up in the election cycle, there are issues with moving it forward,” said attorney Tom Travis, a managing director in Sandler, Travis & Rosenberg, a Miami law firm that specializes in international trade and customs law. “However, I am optimistic it will be enacted, if not before the election, then after the elections.”

California dreamin’

All this talk of delaying CAFTA approval is worrying some Los Angeles textile companies. Last year, Twin Dragon Marketing Inc.—a Gardena, Calif., manufacturer of denim, twill corduroy and woven stretch fabric— opened a fabric finishing and sewing plant in Nicaragua. The new plant can produce 60,000 to 70,000 apparel units a week but is not working even close to capacity.

The Popular Textile Corp.—which knits, dyes and finishes goods at its plant in Vernon, Calif.—is planning to open a huge knitwear and sewing factory in Nicaragua this fall on 6.6 million square feet of land, the equivalent of a small golf course. The company had been counting on CAFTA being approved by the end of 2004.

“We are working with many manufacturing companies to do business with CAFTA and NAFTA program countries,” wrote Song Ho Kim, Popular’s chief executive officer, in an e-mail sent from Nicaragua. “Delaying CAFTA will further hinder the positioning of the market share by manufacturing companies in the USA and North and Central America.”

Numerous provisions and loopholes

Central America was incorporated into the U.S. free-trade world in 2000 under the Caribbean Basin Trade Partnership Act, an extension of the Caribbean Basin Initiative. Currently, apparel made in Central American and Caribbean countries can enter the United States quota- and duty-free if it is made from U.S. cloth and yarn. Knitwear can come in duty-free as long as it is made from U.S. yarns.

CAFTA, whose benefits are retroactive to Jan. 1, 2004, would expand on those benefits.

Under the new accord, Central American apparel makers would be able to use Mexican and Canadian yarns and fabrics and still receive duty- and quota-free treatment. This is known as “cumulation.”

U.S. textile manufacturers feel this would discourage Central American manufacturers from buying U.S. yarns and fabrics.

Central American apparel makers could also use certain fabrics and materials considered to be in “short supply” in the United States and Central America and still get dutyand quota-free status. That means they could import some yarns and fabrics from countries such as India, Pakistan or China.

U.S. textile manufacturers contend that this provides a loophole for Asian countries to flood the United States with textiles and apparel— particularly brassieres and boxers— via Central America.

But backers of CAFTA wonder whether the U.S. textile industry is being too myopic.

“CAFTA keeps textile use in this region,” noted Kevin Burke of the AAFA. “If the apparel industry moves out of Central America, who are the American textile manufacturers going to sell to? Without CAFTA, they’re dead.”