WorldCity Business Magazine

Untying the knots

by Juan N. Cento

In the last few months, many experts made grave predictions about Latin America’s textile industry. After more than 40 years, the World Trade Organization lifted worldwide textile quotas, allowing for a surge of competition from Latin America’s lower-priced Asian counterparts.

Textiles are a critical industry for much of Latin America, now accounting for 80 percent of Central America’s exports. Even without quotas, Latin America can remain competitive, despite the changing face of the world textile trade. The region has unique advantages, including the success of existing free trade agreements with the U.S., as well as the potential for streamlined and cost-effective logistics and shipping resulting from the region’s close proximity to the U.S. That geographic proximity is a significant competitive advantage that must be leveraged, and any obstacles hindering its efficiency must be addressed.

Even the most dire prognosticators admit that changes will not be immediate, nor wide sweeping. Most experts are predicting changes in trade patterns within the next three to five months. However, the industry must remain vigilant. The region’s speed-to-market is being challenged by our Asian counterparts, particularly China, as it builds high volume “mega-ships” that cross the Pacific in just 10 days.

The coming months are critical for the industry in our region. During this time, U.S. legislators will also reach a decision regarding the Central American Free Trade Agreement, now known as DR-CAFTA after the Dominican Republic was added to the trade pact in 2004. While the timing of the expected repercussions from the WTO deregulation and the vote on DR-CAFTA is coincidental, their combined impact on trade patterns in Latin America is absolutely related.

It is hoped that passing DR-CAFTA will bring Latin America’s textile industry many rewards. Free trade agreements such as DRCAFTA and its larger and more established precursor, NAFTA, will help the textile industry to remain competitive. It will, for the most part, allow countries such as El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic to have duty-free and tariff-free access if they use fabric woven or knitted in the United States, barring a few exceptions to the rule. Indeed, DR-CAFTA is integral to the future of the textile industry. While DR CAFTA is expected to pass in Congress this year, it is by no means assured.

The success of NAFTA, entering its 11th year, bodes well for DR-CAFTA. Let’s use Mexico as an example.

As a result of NAFTA, 100 percent of all Mexican textile and apparel exports enter the United States duty-free, and when combined with the improved infrastructure and streamlined logistics and transportation, the outlook for Mexico’s textile industry is strong. Since 1994, when NAFTA was first enacted, the textile industry in Mexico gained access to the U.S. market, stimulating exports to the United States. According to U.S. textiles analysts, the value of Mexican cotton textile and apparel exports to the United States has grown from $3 billion in 1995 to $8.4 billion in 2002.

Similar agreements are also in the works for the Andean countries, including one with Peru, an increasingly important exporter of cotton and some particular high-end apparel that will likely complete a free trade agreement with the U.S. this year.

During the recent Asia-Pacific Economic Cooperation Summit in Chile, many Asian nations leveraged their visit to South America by engaging in trade talks with much of the Mercosur, maintaining a continued sense of urgency for the U.S. to expedite its trade negotiations.

**The governments of Latin America must also be commended, not only for their embrace of, and commitment to, critical free trade agreements, but for the many proactive measures taken to counter the effects of the WTO textile restructuring. Many governments, particularly those of Central America, have taken measures to minimize job loss within the sector, to oversee infrastructure improvements, and to attract investment interest in the textile industry through robust foreign direct investment programs.

It has never been more urgent for Latin America to address the new realities of the textile industry, and now is the time to act. The growing number of free trade agreements, starting with NAFTA, serves as the foundation and backdrop for our continued competitiveness. Now more than ever, as we face stiff competition from Asia, it is imperative that Latin America and the U.S. work together in support of CAFTA to continue initiatives that streamline logistics and shipping costs across the US border. It is this spirit of cooperation, along with a keen focus on competitiveness and connectivity, that will help to ensure the survival of Latin America’s important textile industry.