Playing the Waiting Game on Mexican Fabric

Maybe the odds makers in Las Vegas should start taking bets on when Mexico and Canada can start sending fabric to Central America to make clothing that returns to the United States duty-free.

Right now, even the most experienced trade attorneys, consultants and government insiders are perplexed. They’re uncertain when all the bureaucratic maneuverings will be finished to launch a textile provision called “cumulation.”

Cumulation is a part of the Dominican Republic–Central American Free Trade Agreement that allows set quantities of woven fabric, such as denim, cotton and bottom-weight fabrics, to be shipped from Canada and Mexico to the Central American region for production and then re-shipped to the United States duty-free. In December, a rules change made it possible for certain kinds of wool to be sent in unlimited quantities.

Sending fabric from Canada and Mexico seemed to be a simple addition to the free-trade agreement, particularly after each DR-CAFTA country agreed to the provision. The idea was to give Central American factories a leg-up when competing with Asian factories by having cheaper Mexican fabrics at their disposal.

Optimists were predicting that fabric would be flowing from Canada and Mexico to Central America by March, and then the whole issue got bogged down in the Dominican Republic over a pocket-lining change. “I thought it would be March. But March came and went, and now I’m thinking July 1. But I haven’t stopped taking those bets,” said Jonathan Fee, a trade specialist and partner in the Washington, D.C., law firm Alston & Byrd. Pocketing the blame

U.S. trade officials decided it would be less confusing to implement the cumulation agreement and the pocket lining changes at the same time.

Originally under the free-trade accord, pocket lining could come from outside the DR-CAFTA region. But changes promised to several U.S. senators and congressmen in order to push DR-CAFTA through Congress in 2005 resulted in the stipulation that pocket lining would come from only regional fabrics with a yarn-forward provision. Pocket lining is a profitable venture for U.S. companies. The U.S. International Trade Commission found that the United States produces $80 million to $200 million worth of pocketing annually, most of it sent to Central America for input.

Almost every country in the trade agreement has signed off on the pocketing rule change except for the Dominican Republic. Currently, the provision is mired in that country’s legislature. The Dominican Republic’s Senate on March 25 approved the pocketing change, but the lower house, known as the Chamber of Deputies, is stalling, U.S. governmental officials said.

They say Dominican politicians are holding up the pocketing issue to gain more leverage on another issue that is important for the well-being of Dominican apparel factories. The Dominican Republic has been granted a special concession to use more bottom-weight fabric from outside the region and still be eligible for duty-free status on clothing exported to the United States. The concession says that for every two pairs of pants the Dominican Republic makes from regional fabric, it can make one pair of pants from non-regional fabric. This agreement, however, can’t go into effect until the U.S. Congress passes a law approving the change. The Dominican Republic is pushing for an expedited approval process through Congress.

“The Dominican Republic wants the Bush administration to introduce to Congress this two-for-one issue as a good sign effort before the lower house [in the Dominican Republic] approves the pocketing amendment,” said Nate Herman, international trade director for the American Apparel & Footwear Association, a trade group in Arlington, Va.

The Bush administration said it is working on the issue. Scott Quesenberry, special textile negotiator for the U.S. Trade Representative, said progress is being made on the two-for-one issue.

“The two-for-one has gone through the formal channels, and we have taken the document we created to Congress. We have given them that White Paper and we are working with Congress to see how they want it to be reduced to legislative language,” the textile negotiator said, noting that each monthly delay in cumulation means that 8.3 million square meters of fabric are not available for use in Central America because cumulation is given out on a pro-rated basis. “They are holding up cumulation for everybody.”Dulling the competitive edge

The delay is only making it more difficult for Central America’s factories to compete with Asia. Apparel exports from the DR-CAFTA region to the United States dropped 6 percent to $7.97 billion in 2007 over 2006. “As U.S. fabrics become more expensive, our regional platform struggles to compete,” said Carlos Arias, president of Koramsa, an enormous Guatemalan blue-jeans factory the size of a small town where 1 million pairs of pants are made every month for companies such as Levi Strauss & Co. and Banana Republic. “The uncertainty around it compounded with all of the delays has prevented strategic discussions from taking form.”

The Koramsa executive said getting acquainted with a new mill is always a challenge and takes time. “There is much information to share, systems to establish and credibility to gain. Setting up logistics networks is also important. We know the largest players in Mexico and have a good relationship with them, but there are smaller firms that we have yet to meet.”

Other challenges include a system where fabric from Mexico and Canada are purchased by factories on a first-come, first-served basis instead of a quota system that had been pushed by many Central American apparel manufacturers. “The uncertainty around the first-come, first-served rule of cumulation will limit our buy,” Arias said.

No one is certain when cumulation will take effect. At the earliest, it would be July 1, said Natalie Hanson, director of trade policy at International Development Systems, a Washington, D.C., company that consults on quotas and trade agreements. “We were originally looking at June 1,” she said, noting there has to be a 60-day notification period before cumulation can take effect. “We are still hopeful it will be in July.”

Textile negotiator Scott Quesenberry, however, isn’t as hopeful. “Based on the information we were receiving directly from the Dominicans, I had hoped we would start by May 1,” he said. “Unfortunately, that timeline has clearly slipped, and we have not received any additional information from the Dominicans that would give us a firm timeline.”

Textile Cumulation Rules

bull; Every year, Mexico and Canada can send up to 100 million square meters of woven fabric to Central America to make clothing that then receives duty-free status when shipped to the United States. This cap can grow up to 200 million square meters a year, depending on trade growth.

bull; There is a 20 million-square-meter cap on blue denim and a 45 million-square-meter cap on cotton and manmade bottom weights.

bull; The original cumulation agreement put a 1 million-square-meter cap on wool. In December, an amendment did away with that rule and allowed for unlimited quantities of worsted wool whose average fiber diameter is greater than 18.5 microns, which is used mostly in uniforms and mid-priced suits.