Free-Trade Agreement Brings Hope to Central America
GUATEMALA CITY, Guatemala—Inside a cinderblock-walled factory filled with hundreds of sewing machines, nimble- fingered workers are putting the final touches on a batch of lingerie headed for Los Angeles.
The order of brightly colored underwear is for Underglam Inc., a 6-year-old Los Angeles company that used to do all its production in Southern California.
Then last November, with a state minimum-wage increase poised to take effect on Jan. 1, the company switched all its production to Ripsa, a 20-year-old company that is one of the last remaining lingerie factories in Guatemala. In Guatemala, an apparel worker makes between $1.20 and $1.25 an hour while the California minimum wage is now $7.50 an hour.
“We are doing all the things necessary to keep the lights on and make a profit,” said Noah Walsh, Underglam’s director of sales. “Making this stuff in Los Angeles is not cheap.”
Underglam’s move to Guatemala was precipitated in part by the new free-trade agreement between the United States and Central America. The agreement, officially known asthe Dominican Republic–Central American Free Trade Agreement, is transforming the region into a more viable place to produce apparel because of the duty-free status given to garments made from U.S. or regional yarns.
That transformation was seen at the 16th-annual Apparel Sourcing Show, held in Guatemala City April 17–19 and attended by 5,192 people. There was a more upbeat climate to the show because Guatemala officially joined the free-trade agreement on July 1, 2006, following the lead of El Salvador, Honduras and Nicaragua. The Dominican Republic joined last March. That leaves only Costa Rica, which will hold a national referendum in upcoming months to let voters decide whether they want to be a part of DR-CAFTA.
But with five of the six signatory countries on board, there is definitely some momentum building in the region. Aaron Tavdi, vice president of sales for Antex Knitting Mills in Los Angeles, said his direct sales of fabric to Central America grew 300 percent last year compared to the year before. “CAFTA is really helping with cotton fabrics,” he said. Before, much of Antex’s Central American business consisted of U.S. manufacturers buying fabric to be shipped for assembly in the Central American region. Now, Central American manufacturers are buying enough fabric that Antex has hired Javier de Leon Echeverria to be the company’s sales representative in Central America.
The free-trade agreement is helping textile factories such as Hilos y Telas S.A., a decades-old factory whose 400 workers make woven and knit fabric at a plant located on the edge of Guatemala City. “We have had a lot of inquiries on the woven side of the business,” said Tony Malouf, the company’s export manager.
The woven-fabric business has benefited greatly under DR-CAFTA. That’s because under the Caribbean Basin Trade Partnership Act, the previous free-trade agreement between Central America and the United States, only knit fabric made in the region from U.S. or regional yarns was eligible for duty-free status as a fabric or a garment. Now that duty-free status applies to woven fabric or garments.
That has had a beneficial effect on Guatemala’s Liztex, the largest textile factory in Central America, with 3,000 workers. About 80 percent of the plant’s production is done in woven fabric and the rest is in knit fabric.
“We have gotten back a couple of customers,” said Saul Mishaan, Liztek’s export manager, noting that apparel maker Garan Inc. and General Sportswear, both based in New York, are buying fabric now. “Slowly they are coming back because of CAFTA.”
Liztek’s owner, Joey Habie, said the new free-trade agreement has allowed the company, founded in 1956 by Habie’s grandfather, to be more particular about the kind of business it does. “Business is up 20 to 30 percent,” he said.
But the new free-trade agreement isn’t a free ride. Many Central American apparel companies now have to figure out how to be more competitive and efficient to keep business.
So that’s why Alfonso Hernandez, chief executive officer of The Argus Group, which has six sewing factories and two cutting factories in El Salvador and Nicaragua, is undertaking the painful process of transforming his factories from cut-andsew operations to full-package entities. “Three years ago, 100 percent of our operation was cut-and-sew,” he said. “Now 40 percent is full-package. Eventually it will be 80 percent.”
The company won’t open any new factories for three years while it concentrates on its full-package conversion. Still, Argus will continue to beef up its work force. Last year, the company’s factories employed 6,000 workers. That was upped to 7,500 workers this year. Next year, Argus plans to have a staff of 9,000 workers, who will be making mostly men’s dress shirts, casual shirts, uniform shirts, T-shirts, casual pants and blue jeans. Hernandez said the full-package investment has eroded many of the company’s profit areas, but he expects the company to be in the black this year.
While there are lots of rays of hope for the Central American apparel and textile industry, there are a few storm clouds, too.
Late last year, VF Corp.—the Greensboro, N.C., company that has several brands, including Wrangler, Lee, The North Face and Nautica— remains heavily involved in manufacturing in Central America, said John Strasburger of VF’s Sourcing in the Americas office. Earlier this year, VF sold its intimate-apparel business to Fruit of the Loom, which has been readjusting its sourcing strategy in the area.
Asia is still the No. 1 competitor for the Spanish-speaking area. Even though DR-CAFTA has been in effect for more than one year, apparel and textile exports from the region to the United States have dropped slightly for every country except Nicaragua, which saw its exports climb about 26 percent for the one-year period ending Feb. 28, 2007. That’s because Nicaragua’s wages are about half that of other neighboring countries. And it was also given a special provision under the free-trade agreement that allows it to use up to 100 million square meters of fabric a year from outside the region (including Asia) to make clothing that can be exported free of duty to the United States.
With that in mind, many companies are opting to open factories in Nicaragua. Cone Denim LLC, the world’s largest denim maker, based in Greensboro, N.C., is building a $100 million denim factory in Nicaragua. SAE-A Trading Co., a South Korean company with six huge factories in Guatemala, where production is done for Target Inc. and other big-box American chains, opened three apparel factories in Nicaragua two years ago.
Erik Autor, vice president and international trade counsel for the National Retail Federation in Washington, D.C., blames the apparel drop on the restrictive rules of origin for fabric used in Central American apparel production. Every garment must be made of U.S. or Central American yarn to return to the United States free of duty and quota, except for the special provision for Nicaragua. “Some point to the increased competition from China and other Asia countries and the impact of the end of quotas [for the decrease],” said Autor, who was at the recent Apparel Sourcing Show. “I would argue one of the culprits is an overly restrictive rule of origin and slow implementation of key provisions such as the cumulation of fabric from Mexico.”
Other culprits include the high price of electricity in Guatemala. Alejandro Ceballos—president of Vestex, a trade group representing the Guatemalan apparel and textile industry, and head of Polar Industrial, which makes clothing exported to the United States—said electricity costs are three times higher in Guatemala than in other Central American countries or the United States. Also, the country needs more flexible labor rules so that workers can be paid for only the hours they work in the factory instead of a full 42-hour work week. “If we don’t do something about power and labor flexibility, our days are numbered,” he said. “If we do something about it, we can capture 10 percent of the U.S. market.”