Monday, June 21, 2004

Is there hope for Central American maquilas?

"Thank God for American kids. They change their minds all the time."

That phrase encapsulates what might be the last, best hope for Central American maquilas, at least from the perspective of maquila owners. This recent article from the Wall Street Journal notes that Central American maquila owners -- once they lose their preferential trade status (the end of quotas) on January 1, 2005 -- are no longer going to be able to count on cheap labor as an advantage. China will enter the market, so then maquilas here will have to find other comparative advantages -- and that will mean taking advantage of being closer to US markets, and giving a quick turnaround on new products. The article cites the head of outsourcing at Liz Claiborne as saying that by 2010, he predicts, China could supply more than 80% of all U.S. clothing -- up from about 13% now.

The article is a good primer on the challenges facing Central American textile owners, and workers:

When U.S. pants production fled in the 1980s and 1990s, it largely went south, speeded by the North American Free Trade Agreement with Mexico. Levi Strauss & Co. closed its last U.S. plant in December. Today, more than a third of all pants bought in the U.S. come from Mexico, the Dominican Republic, Honduras, Guatemala and Nicaragua. More than 150,000 people in the region earn their livings making pants for the U.S. market.

What sends chills through the area is this: The end of quotas next year will allow China to ship all the pants it wants to the U.S. -- at prices up to 20% below those charged by producers in Guatemala or the Dominican Republic. The price difference would come even after China pays 17% duties that Central American countries don't pay on cotton pants.
How will Central America be affected?
Companies in Mexico, which makes a fourth of all cotton trousers bound for the U.S., have done little to adapt to coming changes and are likely to be the hardest hit. In Central America and the Caribbean, even optimists concede that about half of the 500,000 jobs at the region's 1,000 garment companies could vanish in the next five years.

"Vendors that get what matters, like speed to market and awareness of the latest trends, will succeed. Those that don't will disappear," says Jeffrey Frye, head of Latin American sourcing for Gap, the San Francisco-based U.S. retailer that, in addition to Old Navy, owns Banana Republic.
Can CAFTA help?

Shipping tends to take two weeks more from China than from Central America. Proximity allows buyers to change their minds later and more often.... One speed bump: Producers in the region must use domestic or U.S. fabric to get duty-free access to the U.S. market. That dependence
increases turnaround times and requires companies to maintain huge inventories.

Central American pants producers are pushing for better access to the U.S. through the Central American Free Trade Agreement. It would extend duty-free treatment beyond apparel to most goods from Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua, and would ease the rules on what fabrics companies can use and still avoid tariffs. The pact, signed by the participating countries last month, faces grim odds in Congress, where Democrats object to what they claim are its weak labor and environmental protections.


Anonymous said...

What is the date for the WSJ article?

David said...

Article mentioned above is dated June 16, 2004.