California Apparel News

By mid-January, the Dominican Republic will be poised to become the latest member of the Central American Free Trade Agreement, leaving Costa Rica the last country to climb on board.

A spokesperson at the Office of the U.S. Trade Representative, which negotiated the free-trade agreement, confirmed that the Dominican Republic should be part of CAFTA, now CAFTA-DR, by mid-September.

While the Dominican Republic’s entry is good news, the agreement with six Central American countries will not be fully effective until Costa Rica joins and certain issues about the use of Mexican fabric are settled.

That does not bode well for the apparel industry in that region. “The Dominican Republic’s joining is just one of many steps that have to be implemented before the brands can take advantage [of CAFTA-DR],” said E.J. Bernacki, a spokesperson for San Francisco–based Levi Strauss & Co., which has been producing jeans and other pants in the Dominican Republic as well as other Central American countries for years. While Levi’s has always supported the trade plan, the company never anticipated it would take so long for the agreement to be up and running, Bernacki said.

The Levi Strauss spokesperson would not discuss how much of the company’s sourcing is done in the Dominican Republic, only acknowledging that it still uses a handful of factories there, including Grupo M, the largest apparel manufacturer in that country, D’Clase Corp., and Interamericana Product. It is a marginal user of factories in El Salvador, Honduras, Guatemala and Costa Rica. That is a sharp contrast to the nearly 300 factories Levi’s uses in China.

By not passing all the necessary laws as quickly as the other four Central American countries in the trade pact, the Dominican Republic’s apparel industry has suffered, said Julia Hughes, president of International Development Systems in Washington, D.C., a source of trade statistics and government regulations related to the textile and apparel industries. “Their trade has taken a hit because companies have moved to other CAFTA countries,” she explained. “But once they finally join, I think it makes a difference in helping the Dominican Republic maintain the business orders they have now.”

During the first 10 months of this year, the Dominican Republic shipped $1.3 billion worth of apparel and textiles to the United States, down 16 percent from the previous 10 months in 2005. That doesn’t even come close to the $2 billion in apparel that Honduras, the largest Central American apparel exporter to the United States, shipped here during the first 10 months of this year. But even Honduras’ apparel exports took a hit, declining 6.6 percent from the same time period in 2005.

But Mark D’Sa, senior director of production at Gap International Sourcing in Miami, a subsidiary of Gap Inc. in San Francisco, doesn’t believe the Dominican Republic’s ascension to the trade pact will make any difference to the apparel industry. That’s because there is already a trade agreement called the Caribbean Basin Trade Partnership Act that allows clothing made in the Central American and Caribbean region from U.S. fabric to return to the United States free of quotas and tariffs. “There is not any mill on the island of the Dominican Republic. So we will still be using fabric from the United States and cutting and sewing it in the Dominican Republic, which is exactly what we are doing under CBTPA,” said D’Sa, who noted that Gap still produces about $50 million a year in pants, jeans, T-shirts and underwear on the island. “If an investor invested in spinning and weaving, it would give the island a huge advantage.”

Coasting with Costa Rica

While the Dominican Republic is almost there, Costa Rica is still moving at a glacial pace to get its Congress to approve the controversial free-trade agreement, which would threaten several state-run monopolies that have a stronghold on the electricity, insurance and telecommunications industries, said Isaac Cohen, president of the Washington, D.C.–based consultancy InverWay and former Washington director of the United Nations Economic Commission for Latin America.

Costa Rican President Oscar Arias, who took over in May 2006, has been pushing CAFTA-DR through the legislative process ever since he was elected. As a result, the international affairs commission in Costa Rica’s Congress approved the pact in early December after debating the issue for 272 hours. That approval opened debate in the lower house of Congress, paving the way for passage.

A report by Global Insight, a worldwide consulting company with headquarters in Boston, predicts that Costa Rica will have the entire CAFTA-DR issue resolved by April 30.

At the U.S. Trade Representative’s office, spokesperson Gretchen Hamel would not predict when Costa Rica will become part of the Central American trade agreement, only saying that the USTR was working on the issue and “hoping for the earliest possible date.”

But Costa Rica is running up against an important deadline that could make or break its entry into CAFTA-DR. “There is a sense of urgency now because the Trade Promotion Authority granted President Bush [in 2002] expires in July,” said Cohen of InverWay. This authority basically gave Bush the ability to fast track free-trade agreements and allows Congress only an up-or-down vote on the pacts but no power to amend or alter free-trade agreements. When Bush’s fasttracking powers expire July 1, Congress could possibly alter some of the provisions granted Costa Rica.

With the Democrats now in the majority in Congress, there could be a number of ideological changes taking place. “So Costa Rica needs to get their act together because nobody knows how the new Congress is going to deal with this agreement,” said Cohen, a Guatemalan native.

Down Mexico way

Next on the list of things to do is getting the Mexican cumulation issue settled, something that had been predicted to take place last summer but still seems to be stuck in mud. “We are still pushing to get the cumulation provisions implemented,” said Nate Herman, international trade director for the American Apparel & Footwear Association, a trade group in Arlington, Va., representing large apparel and footwear manufacturers, most of whom make most of their products in foreign countries. “The [U.S.] textile industry doesn’t really want it, so we are constantly having to push the administration to move it.”

Herman said at least one major barrier has been crossed. The United States has initialed a customs cooperation agreement with Mexico, allowing U.S. customs inspectors to enter Mexican textile mills to certify that the fabric being shipped from Mexico to Central America does indeed come from those factories.

Cumulation basically allows Mexico to ship 100 million square meters of fabric a year to Central America, where it is formed into woven goods and shipped back to the United States free of quotas and tariffs. The agreement does not apply to knit fabric.

Under the overall annual cap, only 1 million square meters of wool can be shipped to Central America every year, as well as 20 million square meters of blue denim and 45 million square meters of cotton and man-made fiber bottom weights. The cap can grow to 200 million square meters if apparel production grows considerably in Central America.

Herman said that on the optimistic side, the cumulation issue won’t be resolved before this summer. “But then again,” he said, “it may not be until the end of 2007.”